Buying a foreclosure may mean that you save a significant amount of money. Whether you are buying the home for your own residence, to fix and flip, or rent out, you can find some great deals out there. Many people believe, however, that the only way to buy a foreclosed home is with cash. That’s not the case, though. Check out all of the ways you can purchase a foreclosure too.
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FHA 203K Loan
Believe it or not, this government-backed loan may be one of your best options, but only if you intend to occupy the property. FHA loans are only for primary residences, so you can’t rent it out. If the home is for you, though, this loan offers great benefits.
You can borrow the amount to pay for the home as well as the money necessary to fix it up. The FHA offers two options – the FHA 203K Streamline and the standard FHA 203K. The streamline loan provides up to $35,000 for renovations, but none of the renovations can be structural. The standard FHA 203K doesn’t have dollar limits; you can borrow up to 110% of the home’s future value after repairs.
You must qualify for the FHA loan which means:
– 580 credit score
– 3.5% down payment
– Stable income and employment
– 31% housing debt ratio
– 41% total debt ratio
– Proof you’ll live in the property
You must also provide paperwork for the renovations, if you use the standard 203K. This may include blueprints from a licensed architect if you make structural changes.
Home Equity Loan
If you own your home right now and want to buy a foreclosed home for an investment, you may tap into your own home’s equity. This is almost like paying cash for the home since you take the money out of your home and pay for the foreclosure.
You’ll need adequate equity in your home in order to do this. Most lenders allow you to borrow up to 80% of your home’s current value. If you already have a mortgage on your property, you must deduct that from the 80%, leaving you with the amount you have to buy the foreclosed home.
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Home equity loans have different requirements that differ by lender. In general, you need:
– A credit score of 680 or higher
– Max loan amount of 80% total LTV
– Max debt ratio of 43%
You can take the funds in one lump sum with a home equity loan or as a credit line with a line of credit. The line of credit allows you to draw funds as you need them, paying only interest on the amount you withdrew. As you pay the funds back, you can reuse the line for up to 10 years. After that point, it becomes a 20-year loan with principal and interest due each month.
HomeStyle Renovation Loan
The HomeStyle Renovation Loan is the Fannie Mae (conventional) loan version of the renovation loan. Like the 203K loan, you can borrow funds to buy and renovate the home. However, you can use the HomeStyle loan on any property, including investment or fix-and-flip properties.
You may borrow money to purchase the home plus up to 75% of the lesser of:
– The purchase price plus the renovation costs
– The ‘future value’ of the completed home
Fannie Mae loans have slightly stricter restrictions including:
– Minimum 680 credit score
– Maximum 28% housing debt ratio
– Maximum 36% total debt ratio
– Stable income and employment
Peer-to-Peer Lending
Finally, if you can’t get your hands on a traditional mortgage, you can explore your options for peer-to-peer lending. You’ll find numerous options for this type of lending including secured and unsecured loans. Depending on how much you need and your financial profile, you may be able to get a short-term loan with no collateral, giving you enough cash to buy a foreclosed home, fix it and flip it, selling it for a profit. You can then pay off your loan and keep the profits.
While cash is king when it comes to buying a foreclosed home, it’s not the only way. The key is to have the money in hand when you bid on the home. If the home sells at an auction, you have a very short window to prove that you have the money necessary to buy the home. It’s important to have all of your ducks in a row so that you can bid confidently and provide the bank or auctioneer with the proof of your ability to buy the home.
