Buying a Foreclosed Home: What to Know
Homes connected to foreclosure can be bought at different stages: before foreclosure through a short sale (which needs the lender's agreement), at a foreclosure auction or sheriff's sale, or afterward as a lender- or agency-owned (REO) property. Government agencies and the government-sponsored enterprises sell their foreclosed homes through their own listing programs, such as HUD Homes, VA REO, Fannie Mae HomePath, and Freddie Mac HomeSteps. These homes are often sold as-is, and rules on auctions, redemption periods, and liens are set by state law.
What the law says
- A short sale is a sale of a home for less than what the owner owes on the mortgage. It happens only if the owner's lender or servicer agrees, and the CFPB describes it as a type of loss mitigation and an alternative to foreclosure. CFPB, What is a short sale?
- When a HUD Home becomes available for sale, it is listed on HUD Home Store (hudhomestore.gov), and listings usually also appear on the local Multiple Listing Service. HUD, How To Sell HUD Homes
- HUD Homes are sold in their "as-is" condition. HUD does not warrant the condition of its properties or pay for repairs, and it strongly urges buyers to get a professional inspection before making an offer. HUD, How To Sell HUD Homes
- HUD Homes not sold under special programs are first offered on an exclusive, priority basis to owner-occupant buyers; investors can buy only after that exclusive sales period ends. HUD, How To Sell HUD Homes
- Buyers cannot submit their own bid on a HUD Home; HUD Home Store says a HUD-registered selling broker must submit the bid. HUD Home Store
- The Department of Veterans Affairs sells VA Real Estate Owned (REO) properties and offers Vendee seller financing on them. VA's fact sheet says Vendee is available to Veterans, non-Veterans, owner-occupants, and investors, and points buyers to listings.vrmco.com for available properties. VA, Vendee Loan Program Fact Sheet (2018)
- Fannie Mae sells the homes it owns through HomePath. Its offer guide says a buyer's agent must be registered in HomePath to submit offers, and that offer priority considers factors such as owner occupancy, sales price, finance type, requested concessions, and closing date. Fannie Mae, HomePath Registration and Online Offer Process (2022)
- HomeSteps is the Freddie Mac division that markets and sells homes Freddie Mac has foreclosed on. Under its First Look Initiative, homebuyers get a 30-day window to submit an offer before facing competition from investors; some HomeSteps homes have been repaired to a level acceptable for mortgage financing. Freddie Mac, What You Should Know About Buying a HomeSteps Home
- Example (Minnesota): after a foreclosure sale, the former owner generally may redeem the property within six months, or within 12 months in situations the statute lists, such as when the amount claimed due is less than 66-2/3 percent of the original principal. Minnesota Statutes, section 580.23
- Example (Hennepin County, Minnesota): foreclosure sales are held by sheriff's deputies in open bidding, the lender's representative bids first, and a successful outside bidder must pay the entire bid at the time of sale. If the former owner does not redeem, junior lien holders may redeem. Hennepin County Sheriff's Office, Foreclosure sales
FAQ
Should I get an inspection on a foreclosed home?
Freddie Mac says foreclosed homes can be in distressed condition or have deferred maintenance, that buyers should always get a home inspection before purchase, and that they should expect a more in-depth inspection for a foreclosed or distressed home.
Can I back out if the inspection finds problems?
The CFPB suggests making a purchase offer contingent on a satisfactory inspection; with that contingency, a buyer is not contractually required to buy if the inspection turns up serious flaws.
What protects me from old claims against the property?
Owner's title insurance protects a homeowner if someone claims a right to the home from before the purchase, such as a prior owner's unpaid taxes or contractors who were not paid. Lenders usually require a separate lender's policy.
Does HUD offer discounts on its homes?
Through Good Neighbor Next Door, HUD offers eligible law enforcement officers, pre-K through 12th grade teachers, firefighters, and EMTs a 50% discount from the list price on certain homes in revitalization areas, if the buyer lives there for 36 months as a principal residence.
Do other federal agencies sell foreclosed homes?
Yes. HUD's homes-for-sale page links to single-family property listings from HUD, VA, the FDIC, the IRS, the U.S. Army Corps of Engineers, Customs, the U.S. Marshals Service, and USDA Rural Development.
Can an investor buy a HUD Home?
Yes, but only after the exclusive sales period for owner-occupant buyers ends.
Related
- What Is a Deed in Lieu of Foreclosure?
- How Long Does a Foreclosure Stay on Your Credit Report?
- The Foreclosure Process Step by Step
- Foreclosure Surplus Funds: Who Gets the Money Left Over?
- How to Stop or Avoid Foreclosure
- What Is Foreclosure? (Including Pre-Foreclosure and REO)
- Foreclosure & Homeowner Law by state
General legal information, not legal advice. Laws change and local rules can differ; check the linked official source or talk to a lawyer about your situation.