How to Finance Foreclosure Property

While many investors have found that buying foreclosure properties a great way to invest in real estate, they have also found that getting the financing to get started can be a bit tricky. This is especially true if you already hold a mortgage for your own home. If you want to begin building your real estate empire with foreclosed properties, then you need to have a good understanding of all the options that are available to you. Knowing how to finance foreclosure property can be just as an important piece of your success as the property itself.

One way to finance your purchase of foreclosure properties is to utilize low interest lines of unsecured credit. These loans are given by a bank and are generally designed to be given as a general purpose or a business loan. It is not considered a mortgage and would not traditionally be used to purchase a home. If you are running your real estate investments like a business though, they may approve you for this type of financing. This type of loan is not intended to be spread out over many years like a mortgage would. In the investor’s mind, this should be considered a short term loan that will give you the cash in hand necessary to complete the transaction, and then pay the loan off in full as soon that the property is sold again. The bank essentially fronts you the cash that you need to turn the deal.

Another way to consider financing your purchase of foreclosed property is by using FHA loans. This type of financing is for a completely different kind of investor. It is not designed to be used by real estate hounds who want to buy and then turn over the property as quickly as possible. Buyers who utilize this program are often required to own a property for a specific amount of time before they are allowed to sell it again. This is a great tool for individuals who are looking to get into their first home at a good price. Foreclosed houses often need a lot of work, and the FHA loan can be used to fund the rehab and renovation, thus driving up the value of the home for resale at a later date. Purchasing using an FHA loan would be considered as more of a long-term investment, but can still be a great place to start.

Hard money lenders are a more specialized, and slightly more risky, type of financing. These lenders are not banks, and thus are not held to the stringent lending standards that banks held to. The higher interest rates that are charged by hard money lenders establish these as short-term solutions that are designed to be used by experienced investors who have a proven track record of being able to turn a property around quickly. The hard money lender will front the cash for the deal, and will be repaid in full as soon as the property is re-sold.

One way to buy foreclosed property is with a traditional home mortgage loan. Many investors shy away from this method of financing because it can be time consuming to get set up, but if this is something that you are familiar with and can do as a second mortgage, then it is a completely viable way to finance the purchase of foreclosure properties. You simply need to put the wheels in motion for the loan well in advance of the auction, since you’ll need to have cash in hand on that day.

A discount mortgage can be another good way to finance the purchase of foreclosed properties if you are planning on selling it quickly. Discount mortgage typically have flexible interest rates. This means that the rate can go up in the future. If you can find a good rate to initiate the loan at, and are comfortable with the notion that you need to sell the property before the rate goes up, then this might be the financing method for you. If you get stuck with a property that you can’t sell, then you may want to refinance the property as a traditional mortgage with a fixed rate, just to protect the base of your investment.

In an effort to avoid financing through traditional means, many investors are becoming money partners. By pooling their cash resources they are available to act quickly on foreclosed properties and then divide the proceeds from the sale of the property back into cash when the deal is done.

A few real estate investors utilize high limit credit cards to finance their investments. This is a high-risk investment, as they are counting on being able to turn the property over quickly in order to make the credit card payments. If they can’t, then they could be in trouble quickly.

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