This article is for educational purposes only. JPMorgan Chase Bank N.A. does not offer three of the products referenced in this article: Home Equity loans, Renovation loans, and Hard Money loans. Any information described in this article may vary by lender.
Buying a home can be exciting. The opportunity to live in a new space and make it your own are just some of the most enticing parts of buying your very own place. When you start shopping for a home, you may be looking for more cost-effective options to make your dream of homeownership a reality sooner rather than later. If you’re looking to save while buying a home and are willing to make a few repairs, you may want to kick off your homebuying journey by looking into REO properties.
What is an REO property?
The most common definition of an REO (Real Estate Owned) is a property that has gone into foreclosure and didn’t sell during auction. If the foreclosed home doesn’t sell, the ownership defaults to the original bank or lender. Some other cases of REO status may include when an owner moves out or passes away, for example. If the heirs to the home are unwilling to pay off the mortgage or sell it themselves, they may give the property back to the lender.
Naturally, the next step is to list it for sale as an REO. Before selling the home, if applicable, the lender must remove any current occupants and liens on the home.
The REO may stay under their ownership for a while if there aren't any REO buyers on the market or if the house is in poor shape. As a potential buyer of an REO, you may get the house at a discounted price, but the purchase procedure may look different than buying a traditional home for sale. You’ll likely see these differences during negotiations and financing.
If you’re ready to explore the REO market, you can find available REO properties on HUD’s (the United States Department of Housing and Urban Development) website, other websites with REO listing options or you can ask a real estate agent for assistance.
Advantages and disadvantages of buying an REO property
The main advantages of buying an REO property are:
- Because the lender is motivated to sell, they price REOs competitively — so, there’s a better chance that you’ll get the house at a discounted price.
- Thehouse title is free from any liens and other claims.
The main disadvantages of buying an REO property are:
- The house is usually a fixer-upper, meaning more time, energy, effort and money are required to make the space livable.
- The house is usually sold as is, so if anything is damaged or gets damaged during the sale, it’s on the buyer to make these repairs.
How to finance an REO property
The most popular way to finance an REO property is the same way you would finance a regular home purchase — with a mortgage. Some buyers will get prequalified for a mortgage rate with the lender selling the REO property to both expedite the process and let the lender know they are serious about the offer.
Here is an extensive list of different ways buyers may finance an REO property:
- Conventional mortgage. A conventional mortgage is typically available to people with good to great credit scores looking to finance a home purchase. They are usually available with fixed or adjustable-rate terms, and aren't insured or guaranteed by government agencies.
- FHA (Federal Housing Administration) loans. A FHA loan is a mortgage loan offered by an FHA approved lender and insured by the Federal Housing Administration. Because they’re insured by the FHA, these types of loans allow flexible credit requirements and may be easier for a customer to qualify. And with low down payment options, FHA loans can be an affordable option for many buyers. FHA loans require an up-front mortgage insurance premium (UFMIP), which may be financed, or paid at closing, and an FHA annual mortgage insurance premium (MIP) paid monthly will also apply.
- Home equity loan. If you already own a house and have a decent amount of equity built up, a home equity loan may be worth considering. This form of borrowing allows you to take out money based on the equity you’ve built up and use it for other expenses, like buying an REO property.Chase does not currently offer this product.
- Renovation loan. A renovation loan is made for borrowers looking to purchase a home and finance renovations. The loan wraps up both expenses into one. A good to great credit score is usually required for this type of loan and the borrowed amount may have certain clauses attached.Chase does not currently offer this product.
- Hard money loan. A hard money loan is often a last resort. It is a way to quickly get cash for a home purchase that requires a lot of maintenance work. They are assessed based on risk rather than credit and come with higher interest, higher down payments and extensive insurance requirements. Some buyers use these loans to expedite the process and then convert them into a more traditional mortgage like a conventional or FHA loan down the line.
Many potential home buyers are unaware of REO properties or may be intimated by the idea of buying a home that previously faced foreclosure. With a proper amount of research, finding an REO property may be worth the discounted price. Paired with flexible financing options, looking into REO properties may be worth the extra effort.
