How Do You Finance a Foreclosed or Bank-Owned Home?
You finance a foreclosed or bank-owned home with the same kinds of loans used for any home, but the seller’s rules and the home’s condition decide which ones work. Owner-occupants usually use FHA, VA, conventional or renovation loans. Investors usually use hard money, DSCR or cash, then refinance once the home is fixed and rented.
A bank-owned home, also called real estate owned or REO, is a property the lender took back through foreclosure and now wants to sell. Banks, HUD, Fannie Mae and Freddie Mac all sell these homes, and each sets its own rules for offers, deposits and closing dates. Many of the homes need work, and they are sold as-is. That combination shapes your financing in ways a normal home purchase does not. The guides below are split by who you are, a buyer who will live in the home or an investor, so you can go straight to the rules that apply.
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What Changes When You Finance a Bank-Owned Home?
Three things change when you finance a bank-owned home, which are the seller’s paperwork rules, the condition of the home and how fast the deal has to close.
| Issue | What to expect | Where to read more |
|---|---|---|
| Proof of financing | A pre-approval or proof of funds is required with the offer | proof of funds letters |
| Seller paperwork | Bank addenda override parts of the standard contract | what banks require from financed buyers |
| Owner-occupant priority | HUD, Fannie Mae and Freddie Mac give owner-occupants a head start | owner-occupant First Look periods |
| Home condition | Missing systems or damage can block a regular loan | financing a home that cannot get a mortgage |
| Repairs after closing | Some loans hold back repair money in escrow | escrow holdbacks on REO purchases |
| Closing costs | Sellers may pay some costs, within loan limits | seller concessions on REO deals |
HUD’s Handbook 4000.1 shows how strict these rules can be on HUD homes. A winning buyer has two business days to send a pre-qualification letter or proof of funds, and financed sales must close within 45 days of contract ratification.
Which Loans Work for Buyers Who Will Live in the Home?
Buyers who will live in the home can use FHA, VA, USDA or conventional loans for homes in good shape, and renovation loans for homes that need work.
- Move-in ready homes: a regular FHA, VA or conventional loan, explained in FHA loans for foreclosures and HUD homes.
- Homes that need repairs: an FHA 203(k), HomeStyle, CHOICERenovation or VA renovation loan, compared in renovation loans for fixer-uppers.
- Bought before a foreclosure of your own: waiting periods apply, covered in waiting periods after a foreclosure.
- Bought with cash and want your money back: see delayed financing after a cash purchase.
Owner-occupants also get a head start on many government and Fannie Mae or Freddie Mac listings. The FHFA set the First Look period for Fannie Mae and Freddie Mac homes at 30 days in 2021. Using hard money for a home you will live in is possible but rare, and the risks are explained in hard money for your own home.
Which Loans Work for Investors?
Investors usually use short-term loans to buy and fix a home, then long-term rental loans or a sale to pay them off.
- Fix and flip loans: short loans that fund the purchase and repairs for a resale.
- BRRRR financing on bank-owned homes: buy, rehab, rent, refinance and repeat, step by step.
- DSCR loans for rentals: rental loans based on the property’s rent instead of your income.
- Cash-out refinancing on a rental and HELOCs on investment property: ways to pull equity out of rentals you already own.
- Self-directed ira real estate: buying with retirement money, and the tax rules that come with it.
- Ground-up construction loans and transactional funding for double closings: for new builds on REO lots and same-day double closings.
Lenders that offer these loans are listed by state in our hard money loans section.
Example
The following is a fictional example. Two buyers look at the same HUD home listed for $150,000. Lena will live there and uses an FHA loan, bidding during the owner-occupant period.
Raj is an investor and has to wait until the exclusive period ends. HUD accepts Lena’s bid, and her lender closes within the 45-day deadline. Raj moves on to a bank-owned house and buys it with a hard money loan he plans to refinance into a DSCR loan once it is rented.
FAQ
Can You Get a Mortgage on a Foreclosed Home?
Yes, as long as the home meets the loan program’s condition rules and the seller accepts financed offers. Homes with major damage may need a renovation loan, or cash, because a regular mortgage cannot close on an unsafe home.
Is It Harder to Finance a Bank-Owned Home?
It can be. Banks sell as-is, ask for proof of financing up front and set firm closing dates. The loan itself works the same way, but the condition of the home and the bank’s deadlines add risk.
Do Banks Prefer Cash Offers on Foreclosures?
Often, because cash closes faster with fewer things that can go wrong. A financed offer can still win with a strong pre-approval, a good price and a realistic closing date.
What Is the Best Loan for an Investor Buying REO Homes?
It depends on the plan. Flippers usually use hard money or cash. Buy-and-hold investors often use DSCR or conventional rental loans, or buy with short-term money and refinance later.
Sources
- HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook (Update 18). U.S. Department of Housing and Urban Development. https://www.hud.gov/sites/default/files/Housing/documents/40001-hsgh-Update-18.pdf
- FHFA Extends the Enterprises’ REO First Look Period to 30 Days. Federal Housing Finance Agency. https://www.fhfa.gov/news/news-release/fhfa-extends-the-enterprises-reo-first-look-period-to-30-days
This page explains general loan rules and is not financial advice. Lenders set their own requirements, so confirm the rates, fees and terms with a lender before you apply.