Buying Foreclosure Properties- Tips and Tricks
The sub-prime mortgage is a thing of the past, property values have collapsed and the foreclosures are up. Banks are highly motivated to get the foreclosed properties off their books, as it costs them money with every passing day.
A foreclosed property that has been ransacked out of spite by the previous owner, or has a lot of differed maintained, is a particularly serious headache for the banks who fully realize that finding a contractor, doing the repairs and managing the whole process while the house is on their books costs them a lot of money. Consequently, in most cases, a bank may prefer to sell the house as-is at a much deeper discount providing the smart buyer a huge opportunity.
Financing the purchase of a substandard house, however, is not possible with conventional financing and a hard money loan is a very expensive alternative that also requires a very large down payment. The smart choice is to obtain a construction loan and wrap the whole thing including, purchase, remodeling, interest reserve, contingency reserve and take out loan into one loan.
The advantage here is that the loan amount will be based on the future value of the property, mortgage payments during construction will be paid through the interest reserve and the final take out loan will be ready to take over as soon as construction is over, not to mention that since the loan to value is calculated based on the future value the buyer’s leverage is maximized.
There are two hurdles to consider though. To begin with the new stringent lending guidelines do require higher credit scores and more documentation is needed in most cases as the stated income loans have for the most part either disappeared or have a very high credit score and cash reserve requirements. The second hurdle is the fact that values have dropped resulting in relatively higher down payments.
With the right combination of a construction loan combined with a prudent plan and a competent contractor it possible to not only buy a home with a substantial built-in equity but to live in a home that has been totally remodeled to one’s particular specifications.