Until now, foreclosed homes> have offered buyers an inexpensive entry into the housing market. But the recent foreclosure freeze announced by several big lenders makes pending deals in all 50 states far more tenuous.
Four big lenders have already temporarily suspended home foreclosures to respond to a slew of complaints about inappropriate foreclosure processes. Now, up to 40 state attorneys general are expected to announce an investigation into mortgage-servicing firms that are accused of submitting incorrect foreclosure filings. During the freeze, lenders will try to sort out whether homes were appropriately foreclosed, and if not, whether the ostensible homeowner -- or yet another lender -- can make a claim on the property.
Until that happens, the continuing mess could affect hundreds of thousands of would-be home buyers. There have been more than 608,000 foreclosure sales year-to-date -- accounting for more than 26% of all real estate sales, according to RealtyTrac.com. In August alone, foreclosure filings hit 338,836, according to the firm's latest data, which means another influx of homes waiting for buyers. If you re in the early or late stage of buying a foreclosed home that's caught in the freeze, here s what you need to know.
If you are about to make an offer
You can proceed, but your offer isn t likely to be considered immediately. Once the freeze is over or that particular home is cleared for sale, you ll be first in line a good spot, since a large number of buyers could enter the market after the freeze is over, says Robert Lattas, a real estate attorney in Chicago.
But you run the risk that your initial offer might end up higher than the home s value at the time it sells, if a post-freeze influx of foreclosed inventory depresses prices. Web sites like Trulia.com and Zillow.com, which track selling prices, can give you a sense of whether prices are dropping in your target neighborhood. If and when you do make an offer, make sure you are able to change it or withdraw without facing penalties, and be sure you re aware of any fees or penalties upfront.
If your offer was accepted
If the bank has already accepted your offer but nothing more consider yourself in limbo while the lender checks to make sure the foreclosure was accurate and a previous owner or lender doesn t have a right to it before you go into contract. Don t expect to hear from the bank; you ll have to contact them to get an update.
Meanwhile, do your own digging. Get a copy of the seller s title policy the document at the core of the foreclosure freeze from the seller, or you can look it up in the public record. A real estate attorney can review titles for about $200 to determine whether there s a lien on the home or any other complications that could hold up the deal. Even if the title is clear, you still have to wait for the bank to determine whether the foreclosure was executed without errors.
Typically, buyers with an accepted offer line up a home inspection at a cost of $250 to $500 and prepare a detailed mortgage application, where fees for pulling the credit report and a home appraisal can total more than $400. That s all lost money if the home isn t ultimately purchased. So you might want to hold off until the home is cleared for sale.
If you re in contract
In most cases, even buyers just a few days away from closing will have to sit tight. But this is not the time to keep quiet. You have to push to get your property reviewed as quickly as possible, says Richard Vetstein, a real estate lawyer in Framingham, Mass. Stay in touch with the bank about your property. They may sort through your would-be purchase sooner if the closing date is close or if you re persistent.
In general, expect the process to take months. Most lenders have not offered details of how homes will be cleared or when. But experts suspect lenders will likely clear homes and "unload [them] in batches because they don't want to flood the market with these super low priced homes," says Lattas. According to a typical contract, the bank has up to two months to work out issues with a home s title. Buyers who back out before then could lose their deposit (typically 10% of the agreed purchase price). If the bank can t resolve the title problems within the time period laid out in the contract, the money is returned.
Still, mortgage rates shouldn't change much during the next 45 days, and if the freeze lasts longer than that, a borrower's rate will reset. One option: Try to lock in your rate for 90 days; some lenders will agree to the extension without a charge or rate increase. Although rates are unlikely to rise significantly anytime soon, even a small increase elevates monthly mortgage payments.
Consider a short sale
When a borrower is close to not being able to pay their mortgage and works out a deal with the bank to sell the home for a lower price than what is owed to the lender, the result is a short sale. These transactions are not affected by the foreclosure freeze.
Such deals haven t offered the best bargains so far, that is. Foreclosures sold at a 35.8% discount on average compared to non-distressed properties from January through August, whereas short sales sold at a 15.6% discount, reported RealtyTrac. But those figures could rise during the freeze, says Lattas.
That s largely because banks do not want to add to their foreclosure inventory, so it s unlikely that lenders will delay short sales and they could be more willing to sell those homes at a bigger discount, say experts.