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Financing a Forclosure/REO Purchase

By Thomas Mitchell

For a lot of people, REO's are an attractive purchase. A real estate owned property, or REO, is a home in which the owners of the property did not maintain their mortgage payments. Then the mortgage lender foreclosed on the property but was not able to sell it in a foreclosure auction. After this happens the lender reclaims the property, wipes out all the debt on it, and offers it back up for sale as an REO. One drawback to buying an REO is that the property is usually sold in "as is" condition, whether it is in need of repairs or not. Depending on your personal needs, you can either buy an REO property as a primary residence or you can use it as an investment vehicle, updating and repairing the property and then selling it for a higher price than you bought it for.

Depending on what you plan to use your REO for, you will have two main options for financing, Owner- occupied or non-owner-occupied. Lenders take risk into account heavily when they give out a loan, so if you choose owner-occupied financing you will most likely get a better interest rate and fairer terms. This is because when you live in the home you're buying you are more likely to pay the mortgage.

Non-owner occupied financing is a mortgage classification that refers to one- to four-unit homes that are not occupied by the owner. These loans are also known as investment loans. The home is usually used as an investment if the owner is not going to live in it. When you apply for a loan to buy an REO, you must specifically state whether you are going to live in the home or not. These types of loans typically come with higher interest rates because if the owner can't find anybody to occupy their property they are likely to default on the mortgage.

Another option for buyers looking to invest in an REO is to find a lender who will offer a mortgage that also includes money for repairs. Most lenders don't want to finance you for an REO that is broken down or not livable. Two options which allow owners to use rent money from tenants to pay off small interest payments every month are Fannie Mae's HomePath loan, and the FHA 203(k). These two finance options are for buyers who need help with fixer-uppers.

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