Adding to Bob's answer, you can usually purchase a house with typical financing in stages 1, 2, and 4 (see below). One big consideration, most common on step 4, is the CONDITION of the property. If there is unfinished construction, gutted or no kitchen, no bathrooms, etc., this can be a red flag for your lender. Even here, there may be special financing available for these scenarios.
There are several stages to a foreclosure. In short, they look like this:
1. Notice of Default (NOD, minimum 90 days)
2. Notice of Sale (minimum 28 days)
3. Auction (Sale)
4. Bank Owned (REO, foreclosed)
During steps 1 and 2, a property will often be listed as a short sale. Here, you can typically purchase with conventional (20% or more down) or FHA financing (as little as 3.5% down). Short sales can require a bit of patience while waiting for the seller's lender(s) to approve the deal (since they're taking a loss). Some go quickly, others can go slowly. There are several factors that can have an affect on how smoothly the procees will go.
Step 3 is mainly a cash deal, also with quite a bit of risk involved. Most properties do not sell here.
Step 4 the property gets put back on the market by the asset manager with a different Realtor (anywhere from a week to several months after step 3). At this point, it can typically be purchased with conventional or FHA financing.
Things to consider about step 4:
Usually priced below market to attract a lot of attention. You will most likely be competing with other buyers here. We've seen 20-30 offers on some properties. Again condition can play a roll on financing if some of the main systems are missing.
As Bob said, it is best to work with a Realtor who has had experience in these types of transactions.
Feel free to contact me anytime.
Tom Goeders, Realtor, SRES
Keller Williams Realty