Understanding how to finance any purchase is important, financing Bank Owned homes are more complex as the new lender has conditions that must be met.
Financing a distressed property is a relatively simple concept but the actual process is complex. It is important that a buyer only uses a Lender and Loan Officer that is experienced in processing these types of loan, otherwise, it can add delays and a buyer could lose their earnest money deposit.
Most buyers generally acquire one property at a time. It is possible to acquire more than one property at a time. Properties can be acquired in bulk sales. To buy in bulk you need a large line of credit, typically in the $1 million-plus range. Buyers are generally not allowed to cherry-pick properties in a bulk sale, they have to take the good, bad and the ugly. However, there may be repurchase clauses in the contract if seller disclosure laws were violated.
When acquiring a Foreclosure you should only work with a qualified Realtor that understands the process. If you don’t it can add to closing delays, contract negotiation errors, undisclosed property issues, the buyer could lose their earnest money or worse a great deal.
Most lenders want to sell the property for cash, but don’t expect a big discount for cash. The asset manager at the lender gets a bonus for the amount of money they can recover from a bank sale. A long time ago when cash was king and financing was hard to get sellers would lean towards cash. Sale Price is now the King and more important net proceeds to the seller. We have seen higher-priced offers lose to lower-priced offers because the terms of the higher-priced offer caused the net proceeds of the lower-priced offer to be higher. Think twice before asking the seller to pay any closing costs, it may cost a buyer the purchase.
Cash is important if the new lender makes a mistake a buyer may need to close cash to protect their earnest money or the deal is so good they don’t want to lose out on the upside.
Cash is also required to prove to the new lender the buyer has adequate reserves to make any repairs the seller will not make. We see a lot of purchases crash because the buyer does not have adequate reserves for repairs that need to be made post-closing.
Sellers of bank-owned properties want to close in 30 days so they don’t incur any additional holding costs: taxes, insurance, utilities, interest payments to the bondholder (just because the property was foreclosed on does not mean the bank does not have to pay the investor their interest).
Financing comes in various forms:
FHA 203k loan program provides the money to acquire and rehab the property. The FHA 203k program at this time is only available to owner-occupants.
FHA 203k loans come in two types: Streamline and Full Work Write up.
203k Streamline is where the amount required for repairs is in between $5,000 and $30,000. These loans can be processed and funded within 30-45 days.
A full 203k with work write up applies when the amount for repairs is over $30,000. It requires an FHA plan reviewer to inspect the property and develop a scope of work and repair estimate. The borrower then needs to find contractors that can complete the work for that amount or less. Those contractors must be approved by FHA before the loan will be approved. It can take anywhere from 45 to 120 days to get this type of loan approved. Most banks won’t wait that long.
Fannie Mae and Freddie Mac also have a rehab loan program that is similar to the 203k, it is open to owner-occupants and also to investors.
FHA has a 203B repair escrow hold back. This is where the property does not meet FHA’s minimum property standards and/or the repairs can’t be completed due to weather conditions (can’t paint exterior peeling paint if the paint will freeze) but the repairs needed are less than $5,000. The cost of repairs is determined by the FHA appraiser or buyer contractor bid. Proceeds from closing are withheld until the repairs are completed. Some lenders will fund the repair escrow monies being held, others will not; the buyer has to put the money up. Banks want all their money at closing, they won’t allow any of their money to be held in escrow while the buyer makes the repairs and the buyer can’t make any repairs until they own the property.
The borrower and the property both have to qualify for these programs. A buyer may qualify and the property may not. Interest rates and down payment requirements vary by lender, borrower, and property. if the lender takes too long, the finance contingency expires, or closing date is missed the buyer is in breach of contract and may forfeit the earnest money to the seller.
Many Banks that sell foreclosures, don’t like these loan programs because they take too long to process the loan. If you acquire a property owned by FNMA or FREDDIE MAC the property may qualify for one of their in house loan programs. The listing Realtor will advertise if the property is eligible for seller financing.
There are some properties these agencies don’t even want to finance even though they already own them, they will only accept cash. The buyer may need to look a hard money lender.
Many sellers of bank-owned properties will require the buyer to be pre-qualified by the Lender of their choice., This is because there are so many Mortgage Companies that do such a bad job at pre-qualifications they want someone to do it they have confidence in. Sometimes there are incentives to use the sellers preferred lender. Sellers want the sale to close on time, they don’t like extensions and will deny them if they can.
Line of Credit is where a new lender provides a line credit secured by other collateral, i.e. your residence, another real estate, etc. This in effect to the seller is a cash sale. Some line of credit lenders will want to approve the property being acquired. Also, they may require all of your other real estates to cross collateralize each property on the line. If you default on one property, it all comes tumbling down, including your residence.
Warehouse Lines of Credit: This is a sophisticated line of credit to investors. Very similar to a line of credit, except your assets generally are not used to secure this line. These lines are typically more than $1million, used for bulk sales and generally only issued to seasoned professional investors with a proven track record.
Hard money loans are high-interest-rate loans. Some of them are short term 6-12 months, so a take out lender with permanent financing may be needed. They are good short term methods to acquire and quick flip a property. If the property is held too long the interest rate costs will eat up all the profit.
Conventional loans are the traditional loan used to acquire a home not needing any repairs. It’s your typical FNMA or FHLMC mortgage loan If the buyer’s credit is good, have adequate cash reserves and a Loan To Value (LTV) ratio of 80% or less the new lender may make the loan even if the property needs repairs.
Rent to own programs is generally not offered by sellers of foreclosed properties. They are offered by investors that have purchased a lender owned home.