Many people are wary of purchasing distressed properties because they think they have to pay in cash. However, that’s not always the case. Here we’ll explore non-cash financing options for different types of distressed housing that makes purchasing this type of property much more manageable.
- Buying a real estate owned (REO) home with a conventional loan
While foreclosure homes sold at auction are often in terrible shape, REO properties that are basically livable, even if they need sprucing up. And they can be purchased using a conventional mortgage from a bank, credit union or mortgage lender. As with regular houses, lenders evaluate the borrower’s credit, income and ability to repay the loan according to underwriting standards set by government-backed mortgage giants Fannie Mae and Freddie Mac.
- Buying a foreclosure with a renovation loan
If a foreclosed home needs an extensive amount of work, you can finance it with a renovation mortgage that wraps the purchase price plus the construction cost into a single loan. One popular program is Fannie Mae’s HomeStyle Renovation mortgage. To qualify, you generally need a healthy credit score of at least 620. Borrowers with excellent credit and high income may be allowed to put down as little as 5% of the purchase price. The funds can be used for any type of renovation, as long as it is permanently attached to the house and can be completed within 12 months.
- Using an FHA loan to buy a bank-owned house
For people with less-than-perfect credit, Federal Housing Administration loans may be the best bet. Government-backed FHA loans are intended to help owner-occupants. They are not meant for investors or house-flippers. FHA loans can be used to buy almost any type of home, including bank-owned homes and short sales. Thanks to federal backing, FHA-approved mortgage lenders are willing to provide more flexible underwriting and accept smaller down payments. The minimum credit score requirement is 500, for a mortgage with a down payment of 10%. With a score of 580 or higher, you may be able to put the minimum 3.5% down.
Regardless of how you pay, the first thing you want to do if you’re considering a distressed property is to find a real estate agent experienced with these types of sales. At Metrowest, we specialize in these types of transactions. Give us a shout today – we’d love to help you start the process!