How to Buy a Bank-Owned Home: A Step-by-Step Guide

Banks typically want a pre-approval letter or proof of funds with every offer. What sellers accept, and when to have each document ready, is covered in proof of funds and pre-approval for bank-owned offers. Getting financing in place first also tells you which homes you can realistically buy.

Match the loan to the property's condition:

• Conventional loans work for homes in reasonable condition. The appraiser may flag safety or structural issues that must be fixed before closing.
• FHA loans allow smaller down payments but require the home to meet minimum property standards, which some REO homes do not.
• Renovation loans such as the FHA 203(k) loan combine the purchase and repair costs in one mortgage, which can make a fixer-upper financeable.
• Cash or hard money is common for investors, especially on homes that need major work. A cash offer may also be more attractive to the bank.

Ask your lender how they handle REO purchases, how long their process takes and what happens if the appraisal finds repairs.

Budget for more than the down payment. Plan for closing costs, inspections, utility setup and immediate repairs, since the bank is unlikely to fix anything.

Start by searching bank-owned homes on RealtyTrac, and save your searches so you see new listings quickly; well-priced REO homes can attract offers fast. Your agent can also watch the local MLS, and government-owned homes appear on HUD, Fannie Mae and Freddie Mac sites.

Before you make an offer, tour the home and read the listing closely for clues about condition, financing limits and how flexible the seller may be. How to find and tour bank-owned homes explains how to read REO listings, how government sales and owner-occupant periods work, and what to check in a vacant home.

The listing agent on an REO home is hired by the bank or its asset manager and represents the seller. Having your own buyer's agent helps you level the field.

Look for an agent who has closed REO purchases before. They will know:

• How the bank's offer portal or submission process works.
• Which documents each seller requires and which forms must be signed with the offer.
• How to read the bank's addendum and which terms are worth questioning.
• How the local REO listing agents operate and how quickly they respond.
• How to price an offer using recent comparable sales and the home's condition.

Some government sellers also have rules about who can submit offers. HUD, for example, generally requires offers to come through a HUD-registered broker.

Your agent can also schedule inspections, request utility activation and keep the transaction on schedule. In most markets, the buyer's agent's compensation is negotiated as part of your agreement with them, so discuss it up front.

An REO offer usually starts with your own purchase contract and then the bank's addendum. Expect the following:

• Required documents. Pre-approval or proof of funds, the signed offer and sometimes the bank's own forms.
• Deposit. Earnest money shows you are serious and is often due within a set number of days after acceptance.
• Multiple offers. Banks frequently ask for highest and best offers when they receive several.
• Counteroffers. Banks often counter on price, closing date and who pays which costs.
• Pricing. Base your price on comparable sales and the home's condition, not just the list price. Investors should also account for repair costs and the after-repair value.

Keep your offer clean and complete. A well-documented offer with realistic terms often beats a slightly higher offer that the bank sees as risky.

Before you submit, make sure your contract keeps the protections you need, especially an inspection period and, if you are borrowing, a financing or appraisal contingency. Ask your agent which of those the bank's addendum is likely to shorten or remove.

REO sellers rarely move at the pace of a homeowner. An offer may go from the listing agent to an asset manager, then to the servicer and sometimes to the investor that owns the loan. Each approval can take time.

What to expect:

• Responses to offers and counteroffers may take days rather than hours.
• The bank may hold offers for a set period before reviewing them, especially on new listings.
• Your offer may be accepted, countered or ignored without explanation.
• Signed addenda and amendments may take time to come back, and every change needs the bank's sign-off.
• Requests for repairs or credits after inspection may take as long as the original offer.

Plan for this. Keep your lender updated, and make sure your rate lock, inspection schedule and moving plans have some slack. If you are renting, avoid giving notice until you have a firm closing date.

The slow pace runs one way, though. Banks are often strict about your deadlines, and missing one can give the seller a reason to cancel or charge penalties. See how per-diem charges work in closing on a bank-owned home.

Once your offer is accepted, the inspection period starts. Use it fully. Because the home is sold as-is, this is your chance to find out what you are really buying.

• Inspection. Get the utilities turned on, then book a full home inspection by a licensed inspector, plus any specialists the home calls for.
• Appraisal. If you are financing, the lender's appraisal must support the price and may require repairs.
• Title. Review the title commitment for liens, unpaid taxes, HOA dues and exceptions.
• Permits and code issues. Check with the city or county for open permits and code violations.

Decide by the end of the inspection period whether to proceed, ask for a price reduction or credit, or cancel as your contract allows. For how to get a vacant home ready to inspect, what to check and what banks will negotiate, see inspecting and negotiating on REO properties.

Closing on an REO home works much like any other purchase, with a few differences. The bank's addendum sets the closing date and often a daily penalty for missing it, the bank usually gives a limited deed, and the home sits vacant until you take over. An owner's title insurance policy and a final walk-through right before closing are especially important.

Budget for closing costs, which can include lender fees, title insurance, recording fees and prorated taxes. The closing cost calculator can help you estimate them.

For deadlines, the deed, utilities, insurance and getting the keys, see closing on a bank-owned home.