Part 2 – How About A Foreclosure?

In this segment of Braden’s first time home buyer adventure he explores the prospect of purchasing a foreclosure.

This is part 2 of a 4-part case study that follows an actual first time home buyer on his home buying adventure. Previous Segment | Next Segment

New Mortgage Qualifying Process

Since we last spoke with Braden there has been a change to the mortgage qualifying process.

The qualifying benchmark rate has increased from 5.14% to 5.34%, thereby making the cost of borrowing more expensive. Or put another way, decreasing the size of the mortgage loan Braden qualified for.

For Braden, this equated to a reduction of $7,000.00 in what he ultimately qualified for before the mortgage benchmark rate increase, so we wanted to know how this has impacted his house search and if this has adjusted how much he thinks he should spend?

A Rate Increase

CMP: How did the increase in the mortgage benchmark rate impact you personally?

Braden: The rate change didn’t really affect me as I am not looking to spend what I am approved for.

CMP: That’s a wise strategy for any first time home buyer. How is your house hunting search going? Are you seeing a good selection of options out there?

Braden: The search has slowed down for sure. I was really hoping more houses would pop up but its been quite slow lately. I am seeing a decent selection of houses but I’m wondering if I’m being too picky. Might be my lack of patience, haha.

Patience Is Good

Patience is a good thing and the right property will come along. Typically what we see is more listings in June and July as folks are thinking about pulling things together and getting settled before the kids go back to school – or the dreaded W word (winter) sets in. Take your time, the decision has to feel right.

What About A Foreclosure?

Foreclosures can be a great opportunity to save some money and scoop up a deal, but they might also be an can of worms so be cautious! A foreclosure comes with a certain amount of risk that as a buyer you need to consider before making an offer.

The most important point that all buyers must remember is that foreclosure properties are sold on an “as-is-where-is” basis without any of the usual warranties. In fact, most sellers of foreclosures will only entertain unconditional offers, which has some precarious risk for the buyer.

Considering that the owner of the property had to default, hence the foreclosure, don’t be surprised to find the property in a rundown state.

CMP: Have you considered a foreclosure?

Braden: I do have my eye on a foreclosure that is listed. I’m back and forth on this and feel that I might miss out if I don’t put in at least a low offer.

Things To Consider – The Home Inspection

Many foreclosed homes will sit vacant for a long period of time and as a result, there may be maintenance issues.

A home inspection will help you understand the costs you may be inheriting as a result of a foreclosure purchase. The challenge is that the seller may not want a home inspection completed before an offer is written as unknown issues may be uncovered which then have to be disclosed.

Push For A Home Inspection on a Foreclosure

For the buyer however, a home inspection is a must-have investment and well worth the money. An inspection, which will cost between $400.00 – $700.00, will give details on, among other things:

• The structure of the home – cracks in the foundation, condition of the roof, windows, and chimney.
• Any mechanical problems such as electrical and plumbing.
• Condition of the appliances including the hot water heater and furnace.

Some Risks To Be Aware Of

As previously mentioned, sellers prefer unconditional offers but before you submit one, be sure you understand your responsibilities and liabilities.

An unconditional offer means if the seller accepts your offer then you are the new owner, period.

Therefore, even though you have been pre approved for your mortgage, which in theory means it doesn’t matter which home you purchase, a foreclosure falls into a different approval process.

Not only does the lender providing the mortgage have to also approve the property, but if you are purchasing with less than 20% down then the mortgage must be insured, and therefore the insurer must also approve the property.

If either the lender or insurer decline the property on an unconditional offer, you are left holding the proverbial bag – or in this case, ownership of a foreclosed property with no approved mortgage.

Also, when you take possession of a foreclosure the home may not be in the same condition as when you first viewed it. In fact, it may be missing some or all of the appliances that were present during viewings.

Unfortunately, previous owners or tenants will sometimes take their financial frustrations out on the property, or may even take the opportunity to sell appliances to generate cash flow knowing full well there is little the buyer can do once an offer has been accepted.

Another risk is if the property is occupied. Believe it or not, removing unwanted / unauthorized owners or tenants is the buyers responsibility and can be a difficult challenge to say the least.

If you are watching a foreclosure it may be beneficial to wait until the previous owner (or tenant) has moved out. This will help avoid incurring any additional costs associated with damages that may occur to the property by squatting owners or tenants.

In Summary

Generally speaking, we tend to advise that a foreclosure is not the best opportunity for a first time home buyer. However, if you have lots of financial flexibility then there are substantial cost savings to be had. Otherwise, the right home and price will present itself and the decision to write an offer will feel right… so be patient.