Purchasing a foreclosure property can provide steep discounts that lead to a lucrative investment. So, how can you buy a foreclosed home with financing? The Texas foreclosure process can go through three stages where the property may be purchased. In each stage, the options are slightly different. If you are new to the Texas foreclosure process, check out our step-by-step article here.
Key Takeaways:
- Financing options will vary based on what stage of the foreclosure process the property is in
- Pre Foreclosure has the most options available for financing
- There are risks in using different types of loans. It’s critical you have the right team behind you to mitigate these risks.
Pre Foreclosure
The pre-foreclosure list can be found in your county. These are public lists, and some companies will skip trace pre-foreclosed property owners to help you reach these people. Understanding your timing is important in preforeclosure. Depending on the time you have available, you can pursue different financing options, and other options may be obsolete.
Conventional/DSCR – These are more common for your standard loan. This can be a great option with low-interest rates, but you will typically need 30-35 days to close on the property. Another limitation of this loan is property condition. The house will have to be in good shape to get loan approval. The difference between Conventional & DSCR is that Conventional is based on the buyer’s income and creditworthiness solely, whereas DSCR will also evaluate the potential rent income the property may generate. Conventional lending and DSCR lending are also known as soft money lenders.
Hard Money – Hard Money Lenders can close extremely fast, and they will happily lend on properties that need repairs. With a hard money lender, we recommend you give yourself at least 7 days to close so you can get a survey done on the property. Hard money loans will often include lending for your repairs too, so they don’t all come out of pocket. These are typically held in an escrow account until the proof of repairs has been provided. Hard money loans are typically limited to 6-12 months and carry a higher interest rate, but they are an excellent option to buy a house fast or to buy a house that needs repairs.
Loan Assumption – With a loan assumption, the buyer would contact the lender with the seller and request to assume the loan they have in the buyer’s name. In other words, you would pay off the late balance and pick up the payments where they left off, but the loan would transfer to the buyer’s name. This can be very attractive if the seller had a better interest rate than what the market currently offers. It can also help buyers make a deal make sense if purchasing with current interest rates does not make sense. The timing for this will vary based on what the bank requires. Note that not all banks will allow this to happen, so it is solely up to the bank.
Subject To – Similar to a loan assumption, the buyer purchases the property and takes over the seller’s loan. The difference is the loan continues to be in the seller’s name, and the lender is not typically notified. This is legal in Texas, and TREC even offers a standard contract to write an offer this way; however, not all banks will allow this. Oftentimes a loan may have a due-on-sale clause that states if the deed is transferred, the entire balance of the loan is due immediately. The lender may see that the deed has changed names and call this clause into effect. It is up to the bank on whether or not to enforce this. Some banks are fine with a transfer as long as they continue to get paid.
In both the Subject to and the loan assumption approaches, the buyer can sweeten the offer to the seller by offering some cash in addition to taking over the existing debt. This may provide extra incentive not only to save the seller’s credit score but also to give them funds to get back up on their feet again.
Foreclosure Auction
If you happen to win a bid at the foreclosure auction, you will need to pay cash for that property the same day. As such, there is not much of a way to finance this unless you are using private money that you borrow from friends or family or a line of credit from a bank.
REO/ Bank Owned
If a property does not get purchased at the foreclosure auction, then it becomes real estate owned by the bank. The bank will often advertise this on their website, and they may list the property on the local MLS in Texas. If you are purchasing an REO property, you can use Conventional lending, DSCR lending, or Hard Money lending when making an offer. Time is less concerning now that the bank has taken ownership, and there is no deadline to sell. That being said, the house is a liability on the lender’s books, so they will want to sell fast, but they are typically willing to accept a conventional loan if extensive repairs are not required.
What Are The Financing Risks?
It is important to note that when you use different types of lending that are not the traditional Conventional or DSCR loans, you may face more risks. The lender may not require an appraisal, so if you are making an investment, you are the one responsible for understanding the real value of the property. You will also need to know how to fix any issues with the property and what cost those may bring. These other lending options are great to help you get deals done, but they also expose you to more risks if you are new to real estate. Having a good team behind you will help you in making the right decisions. Talk with general contractors, insurance agents, realtors, appraisers, and attorneys to guide you in your process of doing your deal.
Do You Have a Deal We Can Partner On?
J&A Home Buyers are investors in Katy, TX. We buy houses all around the greater Houston, TX area and surrounding counties. If you have a deal you would like to partner on, reach out to us! If we can help point you in the right direction for other questions, let us know! We help people get deals done. Maybe your question will help us make our next piece of content 🙂