No matter what you are purchasing, you always want to be an informed buyer. Here is the short list of 10 things you need to know before purchasing your next foreclosure as an owner-occupant. The list is a little different for investors who are making a short-term investment.

1. Special Financing options

HUD, Fannie Mae and Freddie Mac all offer various financing options. Some are for a limited time and most only apply to people that are going to live in the home. For example, HUD offers a $100 down payment program and allows for small repairs that are needed for insurability to be escrowed if they total less than $5000.

2. Reserve Bidding Periods

Government foreclosures currently have a restricted bidding period where only owner-occupants can bid on the home. This weighs heavily to your advantage if you make your offer quickly because you aren’t competing against multiple investors who also see the equity in the home. This period is from 10-30 days depending on the listing. Ask your Realtor for details.

3. You MUST Be Pre-Approved

Don’t wait to find the deal of the century and then talk to a lender. You must have your pre-approval or proof of funds to submit with your offer. Make sure it matches the names that will be on the offer, is written on bank letterhead (not just an email) and is dated within 30 days of the offer. Most people get the pre-approval and then call the lender when they are ready to make an offer to get a new letter with the specific address, current date and offered amount. You will lose if you wait because often these offers are submitted on the weekend when it is harder to get a loan officer on the phone.

4. Know the Property Requirements to get Your Loan

FHA, VA, Rural Housing and Conventional loans all have different standards that they will accept for the condition of the property. If a handrail is missing or the paint is flaking (houses built pre-1978) then FHA will insist on repairs before they will approve the loan. If a panel box is missing a permit sticker VA may not approve the sale until it is remedied. A missing piece of siding may be a problem for Rural funding. Conventional loans may not care that a window is broken but FHA may not approve it until it is fixed. The bottom line is that you need to know whether the house and loan are the right fit.

5. There Are Purchase-Renovation Loans

FHA offers a 203k loan that allows you finance needed repairs or desired upgrades through qualified contractors. It is one closing but they escrow for funds and then inspect the work at required intervals. This does not apply to structural improvements or additions. Ask a loan officer for details.

6. You Have to Have Earnest Money

Most REO homes and government foreclosures require that you have a minimum of $500 turned over to the listing agent or the seller at the time the offer is made. This money is forfeited should you fail to complete the contract outside of the parameters they have given in which it may be lawfully voided. Most homes require $1000 even if you are using special financing like the $100 Down Payment through HUD. This has to be certified funds for Freddie Mac, Fannie Mae and HUD and usually must be deposited within 2-3 days of acceptance.

7. What Are the Neighbors Like

Talk to the neighbors and see what it is really like in the area. Ask all the questions that the bank doesn’t know the answer to like, Did the previous owners ever talk about the basement flooding? or Do you know if they were still having trouble with the roof?. It doesn’t matter why the person lost the home and the person you are talking to may have been friends with the previous owner so NEVER say anything derogatory (besides, that’s just mean). When you buy a house, neighbors can help make it a home.

8. Will The Bank Do Any Repairs

The short answer is Most Won’t. You need to ask your Realtor about your particular seller. In cases where the house has been on the market for a long time and the repair is necessary to get financing, they may give in to get it off the books. You can always ask but keep in mind that they are not in the home improvement business. Even if they do the repair you may not have a guarantee and it may not get done right because they are looking at dollars and cents and don’t really care about quality. Truly, the bank may not even know who does it since the Listing Agent may be able to hire the contractor.

9. What is Your Lender’s Closing Time

Most every foreclosure will have the phrase, Time is of the essence. What that means is that you MUST close the deal by the date on the contract or there is either a penalty (often as much as $300 for missing the deadline and then $50-$100 per day) or the seller can cancel the contract. Make sure that your lender knows this is the case and hold them accountable for what they tell you. Likewise, don’t wait a day or two to get them the documents that they need. The time rolls around rather quickly and those delays really add up.

10. Do You Have An Out

Ask your Realtor what your options are if you decide not to buy. Some banks have an iron-clad As-Is policy that you will lose your deposit if you back out at any time after acceptance. Others give you a 10 day inspection period. Some government foreclosures insist that they get a copy of the inspection report and have a right to remedy the problem if something previously unknown is discovered. You should know all of this before signing a contract.

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11. Your Board Contract Probably Doesn’t Mean Anything

When you make an offer in Louisville on an REO (real estate owned), your Realtor will have you sign a Realtor board contract. In most cases, this won’t amount to much because the banks, HUD, Freddie Mac and Fannie Mae all use their own addendum that effectively nullifies your initial contract. They do this because they are operating all over the US and have to handle these in mass, so they don’t have time to look for the fine print or have an attorney review the details. Instead they take very little information from your offer like the date, buyers, purchase price and earnest money and the closing date. Everything else they put into their own terms and have you agree to those. Review their addendums carefully! Freddie Mac requires all buyers to pay a Re-Key Fee ($120) and pay an additional fee if you don’t use their title company. They don’t waive these fees so be sure you know what they are and agree to them.

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