Financing a Foreclosure
Many people interested in buying foreclosures often hesitate to take the plunge because they do not think they have enough money to buy a foreclosure property. They may be surprised to learn that it may not be as difficult as they imagine. Even if you have struggled with bad credit, no money, or are currently jobless, you may be able to still dive into foreclosure investing.
Financing for foreclosures can come from a variety of sources including the traditional home loan, a home improvement or home equity loan, or qualifying for a VA loan. While these are well-known and common financing method for buying a foreclosure, there are several other creative ways to finance a foreclosure. Which method works best is largely dictated by an individual’s circumstances and the foreclosure they are buying. A few possibilities are outlined below to get you started. The good news is there are several others worth exploring as well.
Assume the Seller’s Obligation
This particular method is used in some circumstances when a home is in the pre-foreclosure stage. This can not be done when, for example, a bank has foreclosed on the property and bought it back. Under this type of arrangement, the buyer agrees to take over the existing mortgage of the homeowner, including paying any delinquent loan payments necessary to bring the loan current. Additionally, the buyer may also offer the homeowner some type of lump sum payment to address any equity in the home up to that point.
Usually, the buyer must qualify for the loan and pay closing fees, including the appraisal cost and title insurance. Approval by the original lender is required; if they don’t approve no deal.
Borrow Against Life Insurance
If you have life insurance, you may be able to either cash in or borrow against the built-up value of the policy. In some cases, you may even be able to secure a more favorable interest rate compared to a few other types of loans.
Using Stock as Collateral
Instead of selling your stock and potentially incurring tax liability on the capital gains, talk to lenders to see if they would be willing to use your stock portfolio as collateral for a home loan. Some lenders will even return the stock if the home appreciates up to a particular level in value.
Hard Money Lenders
Hard money lending sources are popular with beginning real estate investors who may not have money to purchase a foreclosure or who may have bad credit and cannot qualify for a traditional loan. Real estate investors also tend to use hard money sources when they need to purchase a foreclosure quickly. While this is potentially a great funding source for foreclosure buying, it is important to understand that loans through hard money lenders tend to be more specific and stricter in their terms than more traditional lending sources. The main reason for this is because the money they are offering up is not coming from a large commercial lender but from a group of private investors. Therefore, they tend to be more cautious in who is going to receive a loan and how they expect to be paid back.
Find Partner
If you have little or no cash, taking on a partner who does have the cash can prove profitable for all involved. Make a deal with another investor where they supply the money and you supply the sweat equity. After the home sells, you can split the profits per your agreement and have the cash you need to strike the next deal on your own.
Talk to others who have successfully bought foreclosure properties. Not only can they provide you with insight into the financing process for foreclosures, but they may be interested in working with you on a particular project. Another good source is mortgage brokers and realtors in your area. They can point you to other financing sources that you may not have previously considered.
Whichever sources of financing you pursue to purchase a foreclosure, be sure to investigate those options prior to submitting a bid. Time is always of the essence when buying a foreclosure and failure to have your financing in order could result in your bid being cancelled.