Quiz | January 2011
How to Buy Foreclosures
Foreclosed properties generally offer buyers a bargain -- one-third off the price of homes sold by traditional sellers in today's housing market. There are several ways to buy them. Each approach has its pros and cons. Take this eight-question quiz to find out how savvy you are about buying foreclosure properties.
By Patricia Mertz Esswein
January 2011
By Patricia Mertz Esswein
January 2011
Quiz
How to Buy Foreclosures
Question 1 of 8
What's the least-risky way for most people to buy a distressed property?
A. From the homeowner, working with the bank on a short sale
B. At auction on the courthouse steps
C. From the lender, as a bank-owned property
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Quiz
How to Buy Foreclosures
Question 1 of 8
What's the least-risky way for most people to buy a distressed property?
You're right! C. From the lender, as a bank-owned property is correct.
Sorry, wrong!
is incorrect.
The right answer is C. From the lender, as a bank-owned property.
With a "real-estate owned" (REO) property, you're assured that you're doing business with a seller -- basically, an institution -- that has no emotional interest in the home, except to sell it as fast and for as much money as possible.
When you buy on the courthouse steps, you'll typically bid against other investors and the foreclosing lender. You accept the property "as is," with no opportunity for a home inspection; you must pay cash; and the home may still be occupied. A short sale from the homeowner is the sale of the home for less than the balance of the owner's mortgage.
When you buy on the courthouse steps, you'll typically bid against other investors and the foreclosing lender. You accept the property "as is," with no opportunity for a home inspection; you must pay cash; and the home may still be occupied. A short sale from the homeowner is the sale of the home for less than the balance of the owner's mortgage.
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Quiz
How to Buy Foreclosures
Question 2 of 8
You have to wait until a home is in foreclosure to make an offer on a distressed property.
A. True
B. False
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Quiz
How to Buy Foreclosures
Question 2 of 8
You have to wait until a home is in foreclosure to make an offer on a distressed property.
You're right! B. False is correct.
Sorry, wrong!
is incorrect.
The right answer is B. False.
You can buy a "preforeclosure" from homeowners who are delinquent on their mortgage payments. Your offer must allow the owners to pay off their loan, including the sum of unpaid mortgage payments, and possibly more, depending on the market value of the home. If you’re lucky, you’ll grab a great discount from the market value, but you’ll have to deal with a stressed-out homeowner who, despite your best efforts, could still walk away or find another way out of his predicament.
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How to Buy Foreclosures
Question 3 of 8
The foreclosure process starts when:
A. The homeowner misses his first monthly mortgage payment
B. The homeowner is 90 days delinquent
C. The lender advertises that it will sell the home at auction
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Quiz
How to Buy Foreclosures
Question 3 of 8
The foreclosure process starts when:
You're right! B. The homeowner is 90 days delinquent is correct.
Sorry, wrong!
is incorrect.
The right answer is B. The homeowner is 90 days delinquent .
The foreclosure process usually begins when the homeowner is 90 days delinquent on mortgage payments, and it can take up to a year or more, depending on the time mandated by state law between critical milestones. The first of those occurs when the lender files either a “lis pendens” (notice of lawsuit in so-called judicial foreclosure states, where courts are involved in the process) or a notice of default (in non-judicial states where state law outlines the process and the courts aren’t involved). Prior to a foreclosure sale (auction), the lender must also post a public notice of sale. After the sale, states often mandate a redemption period of up to a year, during which the homeowner has the right to redeem the property.
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Quiz
How to Buy Foreclosures
Question 4 of 8
What condition should I expect foreclosed homes to be in?
A. Almost new
B. Old and worn
C. Stripped of everything of value
D. Habitable and updated by the bank
E. All of the above
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Quiz
How to Buy Foreclosures
Question 4 of 8
What condition should I expect foreclosed homes to be in?
You're right! E. All of the above is correct.
Sorry, wrong!
is incorrect.
The right answer is E. All of the above.
Foreclosures come in all kinds of configurations, from recently built McMansions to traditional older homes, to stripped-down and rundown properties. With the rise in foreclosures, banks have become more willing to replace appliances, paint and add carpeting to complete a sale. But you should enter the market expecting just about anything. You never know what you are going to find.
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How to Buy Foreclosures
Question 5 of 8
No worries. Banks will tell you everything you need to know about the condition of a foreclosed home.
A. True
B. False
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How to Buy Foreclosures
Question 5 of 8
No worries. Banks will tell you everything you need to know about the condition of a foreclosed home.
You're right! B. False is correct.
Sorry, wrong!
is incorrect.
The right answer is B. False.
Banks will disclose what they know about the home, which may not be much because, unlike traditional sellers, they’ve never lived in it. A bank generally allows you five to ten days to obtain a home inspection after it verbally accepts your offer. It's also smart to contact neighbors as well as the local fire and police departments to see what they know about the property. Don't expect the bank to share or cover the cost of repairs that turn up in the home inspection, either. It has already accounted for the estimated cost of repairs in its price. Your task is to anticipate that cost and decide whether you can cover it out of pocket or with special financing (like a 203(k) loan available from FHA-approved lenders that covers the mortgage as well as repair and rehabilitation of single-family homes).
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Quiz
How to Buy Foreclosures
Question 6 of 8
Financing the purchase of a foreclosure is almost impossible.
A. True
B. False
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Quiz
How to Buy Foreclosures
Question 6 of 8
Financing the purchase of a foreclosure is almost impossible.
You're right! B. False is correct.
Sorry, wrong!
is incorrect.
The right answer is B. False.
Lenders love cash buyers because they can close quickly, with no strings. Still, you can ask for a financing contingency and apply for a mortgage with any lender. Some programs are tailored to foreclosure buyers. For example, the Fannie Mae HomePath program (www.homepath.com), through which Fannie Mae markets its REOs, offers a HomePath mortgage that requires a minimum of 3% down and is available to owner-occupants or investors. (Its Renovation Mortgage finances both your purchase and light renovation.) Getting financing to buy a foreclosed condominium can be challenging if the building doesn't meet lender guidelines for such things as the percentage of units rented out or unpaid condo-association fees.
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Quiz
How to Buy Foreclosures
Question 7 of 8
Before making an offer on a foreclosure, what should you do?
A. Get prequalified or preapproved for financing
B. Set aside earnest money of at least $1,000
C. Gather proof of funds (like bank statements), if you will pay cash
D. All of the above
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Quiz
How to Buy Foreclosures
Question 7 of 8
Before making an offer on a foreclosure, what should you do?
You're right! D. All of the above is correct.
Sorry, wrong!
is incorrect.
The right answer is D. All of the above.
Lenders want assurance that they won't waste time on you. If you need financing, they may require you to get prequalified with their mortgage department, but you can still shop rates elsewhere. You can get your earnest money back if a home inspection proves unsatisfactory.
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Quiz
How to Buy Foreclosures
Question 8 of 8
It's smart to buy an owner's title insurance policy if you buy an REO.
A. True
B. False
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Quiz
How to Buy Foreclosures
Question 8 of 8
It's smart to buy an owner's title insurance policy if you buy an REO.
You're right! A. True is correct.
Sorry, wrong!
is incorrect.
The right answer is A. True.
While lenders ostensibly convey REOs with clear title, it's smart to protect your interest against title defects or claims against your ownership with an owner's policy. That's particularly true given the foreclosure-processing mess that came to light in the fall of 2010. Ideally, you should obtain an enhanced owner's policy, which covers a broader range of risks than a standard owner's policy. Also, be sure to review Schedule B, which lists exceptions to coverage, especially claims that derive from the foreclosure process.
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Quiz
How to Buy Foreclosures
Results: 0 out of 8 Right
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