REO Property Mortgage Loans For People With Bad Credit

By Gina Pogol
Mortgage Credit Problems Columnist

Jerry Asks: Dear Gina, I have kind of bad credit and wondered if a bank would let me take over the payments if it forecloses on someone else?

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Gina Says:

Dear Jerry,

I believe you are asking if lenders that sell off foreclosure properties allow the purchasers to just take over the loans on the properties--without having to qualify for the mortgage. This would be similar to FHA mortgages, which used to be fully assumable a number of years ago.

Unfortunately, while FHA still allows its loans to be assumed (so does the VA), the new borrower has to apply and go through an underwriting process just like anyone else.

Buying REO property from a lender

If you buy foreclosure property owned by a lender (this is called real estate owned [REO]), you may be able to save some money. Lenders want to unload these properties quickly and with minimal expense.The price may be lower than the market value to encourage buyers, and if the lender chooses to finance you, it may discount the lender fees and other costs. But you don't get to just "take over" the old loan.

Why you can't take over loans on foreclosure homes

There are several reasons for this. First, the old loan is likely to be greater than the home's value, especially these days. So you probably don't want it. Second, the loan may be covered by a mortgage insurance policy, and it may have to be extinguished in order for the lender to collect. Third, if the lender takes a loss, it may choose to pursue the defaulting homeowner in court for a deficiency. Doing so requires that the old loan be written off to establish the damages.

Finally, the lender doesn't want to get one foreclosure property off of its books only to get it back a few months later. So it wants to make sure that the next buyer can finance it. In fact, while the lender won't require that you finance the REO purchase with it, it will likely require that you get preapproved for your mortgage with one of its loan officers before it accepts your offer--just to make sure that you are qualified to complete the buy.

Try hard money financing

If you want to buy REO property or foreclosures at auction, hard money or bad credit lenders won't have a problem if you have bad credit. However, they charge high fees, interest rates are about 5% higher than comparable prime loans, and you have to make a big down payment. That may still be an option to consider if the price on the home is right.



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