How to Buy a Foreclosure as a First-Time Home Buyer


As a first-time homebuyer, there is nothing preventing you from buying a foreclosure as your first home. In fact, many programs exist that help you buy foreclosed properties as a first-time homebuyer. Since anyone can buy a distressed home, here are a few tips that will help you in your search for the ideal foreclosure.

FHA (Federal Housing Administration)

The Federal Housing Administration (FHA) offers programs that help you buy properties in default or in full foreclosure. However, you must buy a foreclosed home listed on the Department of Housing and Rural Development’s website. Keep in mind that the FHA doesn’t offer loans, but insures loans in the event you default on your mortgage. If you have an FHA loan in place, start searching HUD’s website for foreclosed homes listed for sale in your area.

Rehabilitation Loans From the FHA

If you find a home in disrepair and it is in foreclosure status, the FHA has a mortgage program that provides you an opportunity to buy the home. The program is known as the FHA (203k) rehabilitation program. You can use the loan proceeds to fix the home before you actually close on the loan. Your lender will add the repair costs to the principal balance of your mortgage. Since the FHA guarantees the loan in case you default, lenders are willing to take on more risk when offering financing. Here are a few of the FHA 203(k) loan requirements:

Owner-Occupied or multifamily properties only, Investment properties not allowed
Interior projects for townhomes and condos
3.5 percent minimum down payment
Up-front mortgage insurance premium required

Types of Foreclosures

All foreclosure laws vary by state, but the bottom line is if you can’t make your monthly mortgage payment, your lender will attempt to take back your home. Therefore, it’s important to understand a few of the terms associated with foreclosures. They will help you if you’re contemplating buying a foreclosure as a first-time homebuyer.

• Default Status, Pre-Foreclosure- When a homeowner is 90 or more days past due, lenders will typically issue a notice of default. From here, banks will take steps to start the foreclosure process.

• Real-Estate Owned Properties- Known as REOs, these properties are in full foreclosure, and the banks or lenders own the homes outright. Since banks typically don’t want to keep REOs on their books, they will often try and recoup some of their losses by selling these homes for much less than market value.

• Short Sales- To avoid foreclosure, some banks will give borrowers a chance to sell their homes for less than they owe. In the housing industry, it is known as a short sale. Seasoned homebuyers report finding incredible deals on properties listed as a short sale.

Buying a foreclosure as your first home can present an incredible opportunity. You can buy a structurally sound, quality home for far less than the market value. Before you make a solid decision, it is always best to check your credit before you start the homebuying process. With your score in hand, check with multiple lenders to see if you can get a lender to pre-approve you for a mortgage. If you do find a foreclosure you would like to buy, order a home inspection before you sign an agreement to buy.