Mortgage Considerations for Foreclosure Buyers

Buyers who are purchasing foreclosures have several mortgage options today depending on how they intending on using the property and how long they intend to keep it. For buyers who are going to live in the property as their primary residence or plan on keeping the property as an investment for awhile, the 30 year and 15 year fixed rate mortgage is the most popular because the interest rate is a fixed rate for the entire life of the loan so the borrower always knows how much the payment will be every month.

For investors or borrowers who decide they want to keep a property for a short period of time, because they are planning on rehabbing their foreclosure bargain and then reselling it or may be relocating in a few years to another city or area or want to move up to a larger property later, a 5/1 ARM is the best mortgage choice. Variable interest rate mortgages have lower initial interest rates, but they do reset, and if rates go up, a borrower’s payment may be substantially higher. Borrowers should be careful when taking out ARM’s to make sure they can afford the higher payments if rates go up. If interest rates go down, ARM’s really work to the borrower’s advantage.

FHA mortgages are available for borrowers who are purchasing a home as their primary residence. FHA mortgages only require 3.5% down payments and minimum credit scores of 640 as opposed to conventional Fannie Mae and Freddie Mac mortgages that require higher down payments of anywhere from 10% to 25% depending on the borrower’s credit history and score. Borrowers can also obtain a 203K FHA rehab and purchase loan, which allows the borrower to combine the purchase loan with a rehab loan. Also, FHA permits the seller to pay up to 6% of the borrower’s non-recurring closing costs. VA loans do not require any down payments and are available primarily to persons who are in the armed services or who have served in the armed services purchasing a property that they intend to reside in.

Home equity loan and lines of credit are another option for borrowers who own an existing property and have equity they can take out by obtaining a home equity loan or line of credit secured by their existing property and use the funds to purchase a foreclosure property. Home equity loans and lines of credit are shorter term loans and are considered second mortgages. Borrowers should keep in mind that the second loan is secured by their property so if they default on the loan payment, they could lose the property to foreclosure.

Mortgage Broker

When you are looking for a mortgage, you should shop around for the best rate and terms. Working with a mortgage broker is a good idea because mortgage brokers work with many different lenders and can help you find a mortgage product that works for your financial situation. A mortgage broker can also prequalify you for a mortgage so you know how much you can afford, and the seller knows you are qualified to purchase the home.

Despite tight lending guidelines, qualified borrowers have the advantage of obtaining low interest rates loans due to historic low rates right now and purchasing affordable foreclosure and resale homes. It has never been a better time for buyers to invest in foreclosure properties and obtain low interest rate mortgages.

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