What are Government Foreclosures?
Government foreclosures are properties that are being sold by the federal government in order to collect a debt. Government foreclosures can occur for several reasons. The most common is that a person defaults on a government-sponsored mortgage loan. However, foreclosures can also occur because of tax debts or other loan debts. No matter what the reason for the foreclosure, government foreclosures are sold to cover these unpaid debts, and they can often be purchased by the public for significant discounts.
Types of Government Foreclosures
There are several types of government foreclosure properties that are popular among buyers, and each come to be available in different ways. Below are some examples of the most common government foreclosures.
HUD and FHA Homes
The U.S. Department of Housing and Urban Development (HUD) is a federal agency who's mission is to develop and enact policies that help U.S. citizens get better access to affordable housing, and ultimately to increase home ownership opportunities nationwide. One of the main ways they achieve this goal is sponsor banks who provide mortgage loans for buyers with bad credit or low income, who otherwise would not be able to afford a mortgage. Providing mortgage loans is a risk for any bank. In order to encourage banks to provide loans to more homebuyers, including buyers who might not otherwise qualify for a loan, the HUD sponsors the banks who provide them. It does this mainly through the Federal Housing Authority (FHA). The FHA is the division of HUD that is tasked with carrying out it's mortgage sponsorship program.
There are millions of FHA-sponsored mortgage loans in the U.S., and when a homeowner defaults on their mortgage loan, the FHA and HUD will have to use foreclosure as a means of getting back the money lost on the unpaid loan, just like any other lender. Generally, HUD and FHA homes are sold through a trustee, usually either a representative of the lending bank or a local real estate agent that specializes in HUD and government homes. HUD and FHA homes can be found for sale anywhere in the U.S.
The U.S. Department of Veteran's Affairs (VA) is a government agency charged with assisting the veterans of the U.S. armed forces, and in many cases that means helping them secure home mortgage loans. The VA sponsors mortgages for veterans in the same way as the HUD or FHA, often with much lower associated costs and interest rates than would be available under normal mortgage conditions. Just like in the case of HUD, the VA will have to foreclose on home that have unpaid mortgages in order to recover the money lost. VA home foreclosures can be found all over the U.S., but are especially common in areas near military bases. They can be purchased for great low prices, and buying them helps the VA continue to lend to other veterans in the future.
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac are two government-sponsored enterprises that seek to raise money through investment to help sponsor home mortgage loans by insuring loans and providing sponsorship to private lenders, such as banks. Fannie and Freddie are responsible for countless home loans nationwide, as two of the biggest mortgage sponsors in the world. Fannie Mae and Freddie Mac foreclosures happen in the same way as other foreclosures, with the money raised from a public sale going back to Fannie and Freddie to help them continue to sponsor mortgages in the future.
Tax foreclosures are homes that are being sold due to an unpaid tax debt owed by the previous owner. If a person is found to have avoided taxes or owes a large tax debt to the government that has gone unpaid, the only way to collect the debt is sometimes to repossess the tax dodger's property and sell it. Tax foreclosures are quite common, and often provide chances to find serious discounts on real estate for buyers.
How to Buy Government Foreclosures
The first step in buying government foreclosures is to locate properties for sale. One of the best ways to find government foreclosure listings these days is through an online foreclosure listing service. These services can bring you hundreds of listings at once, so you don't need to spend your time looking for listings on your own. Foreclosure listings allow you to compare properties before you visit them, so you can focus on what interests you from the beginning.
Getting a Title Search
After you've identified a property that interests you, the first step is to have a title search performed on the property. A title search will reveal any other liens on the property, and this is a very important step. If you buy a government foreclosure with additional liens on it, you could become responsible for paying off that debt later. This can eliminate the potential for savings you might get on a discounted purchase, so it's important to make sure the property you want is free and clear of any other debts.
Inspections and Appraisals
By contacting the trustee of the government foreclosure sale or the agency in charge of the sale, you can schedule a home viewing and inspection. This is a great chance to get an inside look at the property and make sure of its value. Many buyers bring along contractors who can assess the cost of any damages to the home that will be necessary to repair, as this can hurt your bottom line. It's also important to have the home appraised by a professional property appraiser. Getting an idea of the property's market value will help you judge how much you want to spend on it.Most foreclosures can be purchased for 10% to 50% below their market value, but additional repair costs can hurt the potential for savings. That's why it's key to get an appraisal value.
All foreclosure buyers should get financing before they attend government homes auctions or place bids on government homes sold as REOs. You have to know how much you have to spend before you start bidding, so securing financing first is key. The great thing about government homes is that many sales come with opportunities for buyers to qualify for specialized loans. If you buy in certain neighborhoods or you plan to fix up a property, you can get great deals on financing through government-sponsored loans, so be sure to look into all your options.
Buying at Auction
Once you've determined that a government foreclosure for sale offers a potential for value, the final step is to attend the auction and bid. If the bidding goes over what you're willing to pay, have the discipline to stop bidding. There are plenty of other opportunities out there for buying discount government homes, and you don't have to win the first property you attempt to buy. It's important to wait for the right price and deal.
Benefits of Buying Government Foreclosures
Government foreclosures are one of the best ways to buy cheap real estate. The offer discounts you won't find on any other kind of real estate, and that means getting instant equity in your purchase. Buying below market value today means that tomorrow you could turn around, sell the property for market price, and make a profit instantly. Whether you're buying the property to rent out as a source of income or to make the home your primary residence, the potential for savings means getting an inexpensive mortgage and the opportunity to earn big investment value in the future.
Buying government foreclosures also means you can qualify for special incentives. The VA and HUD often offer special discounts on mortgage terms, or opportunities to take out mortgage loans that include repair costs, all for low initial costs and controlled interest rates. Be sure to talk to the trustee of the property or the local government agency you buy from to see what kind of options are available!
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