Why do people consider buying a foreclosed home? There are a few good reasons. The price is usually a big factor – you’re able to potentially get a lot more house at a bargain price point. The property may also have a lot of potential that you can bring to life.

While there are some easily recognizable pluses to buying a home at an affordable amount, there are also risks associated with foreclosed homes you’ll need to be aware of. You could face maintenance concerns or a lengthy closing timeline. There are remedies for almost all of the drawbacks, but you’ll still want to be aware of roadblocks you might face.

We’ll explore what foreclosure means, how you can benefit from buying a foreclosed home, and the drawbacks you’ll need to keep an eye on.

What Does Foreclosure Mean?

A home in foreclosure is owned by the bank, after being taken over from a homeowner who stopped making payments on their mortgage. There are several stages in the foreclosure process, and it will be important to know the status of the property you’re interested in because it will affect your strategy for buying the home.

How To Buy A Foreclosed Home

There are different stages in the foreclosure process in which you can purchase the property. In the early stages, it may still be owned by the defaulting homeowner, allowing you to negotiate person-to-person and on a potentially condensed timeline. In the later stages, the bank takes ownership, and you’ll have to work with them to complete the purchase.


In this stage, the lender has notified the current owner they are in default and that they intend to foreclose on the property. If the homeowner can sell it in time, they can avoid official foreclosure proceedings and the negative effects on their credit history. This can give them an incentive to reach an agreement and negotiate a sale.

These listings usually appear in city and county courthouse buildings and online search tools.

Short Sales

A short sale is when a lender accepts less for the property than what is owed on the mortgage, resulting in a loss for the lender. The original borrower doesn’t have to be in default on their mortgage payments for the lender to agree to a short sale, though. Other indications of financial hardship that would lead to default, like the loss of a job, can prompt a lender to agree to short sale terms.

Homes in this stage of foreclosure are usually underwater, meaning they are now worth less than what’s outstanding on the mortgage. Because the lender has to agree to “sell the property short,” resulting in a loss for them, sales in this stage can take months to go through. You can identify foreclosure properties in this stage advertised as “pending bank approval.”

Sheriff’s Sale Auctions

Purchases in this stage of the foreclosure process happen after a lender has notified the borrower of default and allowed a grace period for them to catch up on mortgage payments. The auctions are usually held at a city courthouse, managed by local law enforcement, hence the name. The properties are publicly auctioned to the highest bidder.

Notices of these auctions can be found in local newspapers and other online platforms.

Bank-Owned Properties

If the property has made it to this stage, that means it didn’t sell at auction or the other previous stages. At this point, it reverts back to the lender and becomes a real estate-owned (REO) property. You would work with the financial institution’s REO department to close this deal.

Government-Owned Properties

For homes purchased with loan guarantee programs, such as FHA and VA loans, foreclosure results in them being repossessed by the government and sold by brokers representing the particular federal agency. In this stage, you’ll work with a government-registered broker to purchase the property. You can search for these listings on the US Department of Housing and Urban Development (HUD) website.

Benefits of Buying A Foreclosed Home

Understanding how the foreclosure process works and the different stages at which a purchase can occur may leave you wondering if it’s worth buying a home through this process. Like we explored at the beginning of this post, there are several benefits of buying a foreclosed home that can make the time spent worth your investment.

  1. Low Prices. The biggest selling point for buying a foreclosed property is that they almost always sell for less than comparable homes in the area. Lenders want to recoup what losses they can and get the property off their books to reduce any further financial risk, which helps you get a great deal.
  2. A Clear Title. When purchasing from a homeowner, back taxes or liens can block your sale. In the case of a foreclosure purchase of a bank-owned property, the lender clears the title to ensure the sale takes place.
  3. You Still Have Loan Options. While the bidding and buying process may be different for foreclosed properties, you’ll typically still enjoy access to various loan programs to finance your purchase.

Risks of Buying Foreclosed Homes

Getting a house at a great price can seem tempting, and while it’s not necessarily too good to be true, you’ll want to understand the risks involved and carefully evaluate your purchase.

  1. Maintenance Concerns. Even if the owners still occupy the home, normal maintenance and upkeep might have been neglected. Since they are in the process of foreclosure, they likely have less interest in paying for normal wear-and-tear, or even major repairs.
  2. Hidden Costs. If you’re purchasing a bank-owned property, they will clear the title to ensure the sale takes place, but that’s not necessarily the case when your purchase happens in other stages of the foreclosure process. If you purchase a property at an auction, for example, you may be liable for back taxes and liens associated with it.
  3. It’s a Slow Process. Because of the paperwork and processes that have to take place, buying a foreclosed home in almost every stage other than pre-foreclosure will likely take longer than a regular owner sale. The longer the house sits on the market without an occupant also increases the risk of its condition declining.

Buying a foreclosed home isn’t for everyone. You’ll need patience and must carry out your due diligence to ensure it’s a worthwhile investment. Just like a regular owner purchase, you’ll want to start the process by talking with your lender and securing financing. Get connected with one of our expert loan officers today to discuss your options for financing.

The included content is intended for informational purposes only and should not be relied upon as professional advice. Additional terms and conditions apply. Not all applicants will qualify. Consult with a finance professional for tax advice or a mortgage professional to address your mortgage questions or concerns. This is an advertisement. Prepared 5/6/2021.