Financing for bank owned property

Asked by Tim, Peoria, AZ Tue Jan 22, 2008

I've been trying to purchase a short sale home. It is scheduled for auction in a few weeks. If the house forecloses can I use my same financing to purchase it? My realtor told me that you can't buy a foreclosure using financing... you have to pay cash.

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10
Rudy Bachraty, , Fort Collins, CO
Fri Feb 6, 2009
Hi Jim!

Thanks for taking the time to provide such a detailed answer. I see it's your first time posting on Trulia Voices and want to welcome you to the community. Some community members are sensitive to agents from out of state answering specific local questions. I value your professional opinion and believe you have added value and expertise to the conversation. That being said, I understand that some questions from consumers may have relevance nationwide but some questions are more specific to a certain geography of local market such as this question by Tim. He is looking to buy in Phoenix.

I'd love to see you re-purpose your answer below and publish it as a blog post on Trulia. Make sure Ohio is in the title and location so people looking for this great info can easily find it on Trulia and the search engines :)

Thanks again Jim!

Best,

Rudy
Social Media Guru at Trulia
3 votes
Jonathan Dal…, Agent, Glendale, AZ
Sun Apr 26, 2009
The last answer couldn't be further from the truth. You need cash only if you purchase at the trustee's sale on the courthouse steps, otherwise you can finance.
0 votes
Get-smart, , Durham, NC
Sun Apr 26, 2009
You have to get your own financing or come with cash. The foreclosing lenders needs to satisfy the note and the only you can use the financing that the owner has is through assuming the loan and that has to take place before the bank repos the house.
0 votes
Jerry Centner, , Gilbert, AZ
Mon Feb 9, 2009
Tim, I currently work with several banks selling foreclosures throughout the Phoenix area. I would have to say that about 80% of the properties that we sell are purchased not for cash but are being financed. Most of these buyers are using one of several FHA programs. I am not a lender, banker or mortgage broker, but I would suggest that you speak with one and get the skinny on the current programs.
0 votes
Jonathan Dal…, Agent, Glendale, AZ
Thu Feb 5, 2009
As helpful as the explanation of foreclosure law in Ohio and Texas might have been for the SEO, here's the deal for Arizona which is the only state's law that actually matters for your question:

1) If you're trying to purchase at the trustee's sale, which is to say you're going to bid on the house on the steps of the courthouse on the auction date, financing won't work unless you're pulling a line of credit and have ready cash. You need $10,000 as a deposit on the date of the auction and the remainder of the funds in cash within 24 hours.

2) If you're trying to purchase a bank-owned home after it reverts back to the bank, meaning no one bought the house at the trustee's sale, then you can finance as you would with any other sale (as long as the condition of the home is conducive to financing.)

Your Realtor likely will tell you the same. At least I sure hope he or she does.
0 votes
Jim Beatty, , Toledo, OH
Thu Feb 5, 2009
Our state is a Lien Theory state, and here's how it works in Ohio.

1) yes, you can finance a short sale before the foreclosure (you already know this), provided your debt ratio/down payment and credit score meet the financing requirements and the appraisal shows adequate collateral

2) in Ohio, you can finance a property purchased at the Sheriff's Auction (they collect a 10% deposit from the winning bidder at the time of the auction, but this deposit is forefeited if the buyer can't come up with the money in 28 days...but if you have a final approval in that time, they will likely extend the closing). HOWEVER, in order to get financing, the appraisal still needs to show adequate collateral or your lender won't make the loan! Having said that. there are a couple exceptions that I know of...express path financing works on qualified fannie mae repos and fha financing can work on others (but there are certain limitations on fha...if you already have an fha loan, you can't get another one till the first one is paid off...and you need to buy "owner occupied").

3) the lender only buys the property back if no one bids, or if the lender bids the property up to a certain dollar amount in attempt to recover some of their loss. In Ohio, the minimum bid is 2/3 of "appraised value". The "appraisers" don't always have a background in appraisal, though and can get the job a variety of ways (being a relative of a County Official can do it sometimes! but I digress) Let's say the property is valued at 100k, the 2/3 bid is 67k, but let's also say the lender is on the hook for 80k after PMI eats their share (foreclosure insurance). The lender may very well place the opening bid at 80k or so (or iif they already have plenty of inventory, they may let it go for minimum bid, provided someone else bids)

4) if the lender is the higest bidder for what ever reason, they buy the property back. How do they pay for it? They buy it with the value of the mortgage (basically extinguishing the mortgage and taking back the property and calling it "even steven" as far as their new "purchase price" of the property, but they can still go after the foreclosed owners for a deficiency judgement)

5) now it is a "post foreclosure" property. The asset managers will do their thing and eventually list it with a real estate company. You can now buy it the way you would buy any other foreclosed property...either cash, or provided your debt ratio/down payment and credit score meet the financing requirements and the appraisal shows adequate collateral. There's that adequate collateral thingie again.

The fly in the ointment with the "adequate collateral" thingie is that if the house isn't habitable, it shouldn't be financable (in theory...as we saw in the hysteria that came before the bubble burst, some of the appraisers seemed to not notice some serious defects in the property. An appraiser who purposely does this, and any one in cahoots with him, like the mortgage broker and possibly the buyer, may be committing fraud, so while I'm sure there will always be those who take do this, I recommend that you don't get involved!...again, I digress).

The reason that many foreclosed homes are not financable is because they are no longer habitable. Vandals may have stolen the copper plumbing, cabinets, furnace or other valuable fixtures -or- the property may be in such a state of disrepair with leaky roof, structural defects, etc. You can't live in a house that way, so it is not habitable, therefore it is not adequate collateral and therefore can not be financed (unless you have a special financing program, or a crooked appraiser as mentioned before and still not recommended)

There is still the possibility of a "re-hab" loan, but these are typically very expensive loans based on the "theoretical value" (fixed up value), but many will charge like 5 points up front, have double digit interest rates, might only cover 50-60% of the theoretical value and the borrower will need excellent credit, lots of reserves and low debt ratios.

So there you have it.

You can buy a house as: 1) a pre-foreclosure 2) at the foreclosure auction or 3) post foreclosure. In Ohio, the financing can be accomplished provided your debt ratio/down payment and credit score meet the financing requirements and the appraisal shows adequate collateral in any of those stages.

The pre-foreclosure stage may offer a couple ot alternatives:

During the RTC housing crisis of the 90's , I financed a pre-foreclosure by contacting the people who had purchased the mortgage and negotiated to get them to let me assume the loan. You could also, in theory, buy the paper yourself and negotiate deed in lieu or foreclose on the property yourself in the case of pre-foreclosure, but these are advanced techniques outside the scope of this discussion.

This process will vary from state to state, but this is a pretty good discription of the process.

Good luck!
0 votes
Ann Heitland, Agent, Flagstaff, AZ
Wed Jan 23, 2008
Your Realtor needs to negotiate a short sale with the bank prior to the scheduled auction. In Arizona, at the auction itself, cash is allowed. But the bank is likely to buy the property itself at the auction and then offer it for sale at what it thinks is market price for quick sale. Meanwhile, the bank will be open to offers from well-qualified buyers. You and your agent will have to be patient and fill out more paperwork than usual since banks move very slowly and don't care about deadlines for response that you might put in your offers.
0 votes
Mr.P, , Arizona
Tue Jan 22, 2008
Is the auction scheduled in a few weeks a trustee sale? If so, most if not all require funding in 24 hours.
Difficult to finance, if not impossible.

If the home is foreclosed and now an REO property, you can use your traditional financing for purchase.

All other auction generally can be financed.

Beware reserve price auctions.

Good Luck
Patrick
0 votes
Dan Mullarkey, Agent, Scottsdale, AZ
Tue Jan 22, 2008
Not true, you can finance a bank owned home, but talk to your lender regarding the loan program that you will be using, some foreclosures are not FHA approved which means you can't use FHA financing.
0 votes
LS, Home Buyer, Dallas, TX
Tue Jan 22, 2008
May be different in Peoria but in Texas- you CAN finance a foreclosure (I can see the rationale in cash only for an auction though)
0 votes
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