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For many homebuyers and investors seeking to purchase a pre-foreclosure or a bank-owned foreclosure property, one of the most difficult aspects of purchasing a distressed property is finding financing for the foreclosure deal. While homebuyers are very happy to see home prices dropping, the credit crunch has put a clamp on foreclosure financing and many foreclosure lenders are scrutinizing each deal.
Therefore, to purchase a pre-foreclosure property, homebuyers will need to come up with enough cash to reinstate the loan that is in default. Reinstatement will stop the foreclosing lender from foreclosing on the distressed borrower. To reinstate a delinquent mortgage or deed of trust loan, an investor or homebuyer may need to come up with $10,000 or $15,000 to put the loan back in the foreclosure lender’s good grace. Unfortunately, many buyers don’t have $15,000 or more in their savings account.
Depending on the price range of the foreclosure properties an investor plans to buy, he or she will need startup capital to pay the loan reinstatement costs, rehab costs, closing costs, carrying costs, sales marketing costs and other expenses associated with buying and carrying foreclosure real estate.
Foreclosure lenders come in myriad shapes and forms. The money to finance a foreclosure deal can come from many places, including personal investment funds, home equity lines of credit (HELOC), credit cards, financial companies, conventional mortgage loans, hard money lenders, private investors or an investment fund created by family and friends. Moreover, buyers can use any combination of the sources mentioned above to structure the foreclosure financing. For example, an investor could borrow 90 percent loan-to-value (LTV) on a conventional loan and borrow the remaining 10 percent using a line of credit (or credit card).
The good news for foreclosure investors is that mortgage interest rates have been slowly rising, but they are still low compared with past years. But most foreclosure lenders are now requiring larger down payments and higher credit scores before accepting a loan application to buy foreclosure real estate. Foreclosure lenders don’t want to get burned again with more foreclosures.
FANNIE MAE FORECLOSURES
Fannie Mae, the largest U.S. mortgage finance company, changed its guidelines recently to discourage homeowners from walking away from their loans. Fannie Mae and Freddie Mac both help the mortgage market function by purchasing pools of loans and packaging them into securities. The two companies are known as government sponsored entities because they were created by Congress. Fannie and Freddie primarily back so called conforming loans, those made to borrowers with good credit and large down payments. And Fannie and Freddie’s role in the mortgage and real estate markets is likely to grow, as Congress recently allowed them to back larger mortgages — up to $729,750 from the previous limit of $417,000.
Many foreclosure investors keep their properties as a rental after rehabbing the property. Some investors go out and refinance the foreclosure with a new conventional mortgage. Refinancing a foreclosure purchase loan is very common. Depending on the lender, homebuyers may be able to do what is commonly referred to as a cash out refi, pulling out a portion or all of their rehab money. The cash can then be used as a down payment on the next foreclosure property purchase.