How Long Does it Take to Close on a Foreclosed Home? (And What Do You Need to Look Out For?)
9th March 2010
The other day I wrote a post on how long it takes to close on a short sale, and the 
answer is that it depends, but it could take a long time. With the April deadline for the home buyer’s tax credit approaching fast, home buyers are wondering if they will have the same issues when they buy a foreclosed home. The tax credit has two components, first, the contract has to be written and accepted by the end of April, and second, the home has to close by the end of June. So the big question is, if you buy a home now, that is make an offer and get the property under contract, will you have enough time to get the financing wrapped up and the loan closed by the end of June. The answer here is yes, in most cases there will be plenty of time to close, even if you wait until the end of April before getting your contract together. But there are special issues you need to be aware of when dealing with foreclosed homes, and if you are better prepared, the process will go smoother and with less stress.
A foreclosure is a bank owned property. This means the bank (it could be the loan servicer, or it could be the end lender, like Fannie Mae, Freddie Mac or HUD) have already gone through the foreclosure process and the home is now a liability they need to get rid of. From the bank’s standpoint, the difference between a short sale and a foreclosure is motivation. A short sale is a potential problem. It may be in the banks best interest (it usually is) to negotiate and take a smaller loss with a short sale than to wait, and take a bigger loss. But the banks aren’t set up for these transactions, and a potential loss isn’t near as motivating as a big loss that is already on their books. By the time a foreclosed property hits the market, the bank already knows how much the property has cost them, they know what condition it is in and an idea of the range in market value. By the time the foreclosure is listed for sale, it is an old problem where the bank has already sunk money into it, and someone at the bank is assigned to sell the property. At this point they are ready and able to make a deal. So with a motivated buyer and a motivated seller, the home should be able to close quickly, right? Not necessarily. There are a number of land mines common with the sale of foreclosed homes which take extra time and may delay the closing.
Things to watch out for when buying foreclosed bank owned properties:
Condition of the property – This is the big one. Foreclosed properties are sold “as is”. This means the bank is selling the home in its current condition and they will not make any repairs to the property. This is usually the biggest problem with foreclosures, but also a big reason that they are priced so low. This means that you need to do a thorough home inspection so that you know everything that is wrong with the home, and an idea of how much it will cost to fix it. But this brings up another problem. If repairs are needed, most loan programs (both conventional and FHA) will require that the repairs are done and the home be in good shape before you can close. The problems with foreclosed properties can range from minor to the need for a full rehab. But even if the work is minimal, don’t expect the bank to do the work, they won’t.
So if any repairs are required, it is up to you to get them done. There are two options for this:
1. Do it yourself – If the repairs are minor, many home buyers are doing the work themselves, before the close and before they own the home. If you ask any good real estate attorney what they think about this, they’ll tell you it’s crazy and you are taking a big risk. And they’re right. But this is done all the time, and when the repairs are relatively minor the risk might be worth the reward since spending a little now could save a lot later.
2. FHA 203k Rehab Loan – This option is best for any situation where there are more extensive repairs. With the FHA 203k loan you can buy with a low 3.5% down payment, just like with any other FHA financing, but you can include the cost of the repairs (or remodeling) into the loan amount. There is more work involved with these loans. In addition to approving you and the property, we also have to approve the work you plan on doing. We need to get a detailed contractor’s estimate, and the appraisal shows the value of the home as it is now, and what it will be once all the work is completed. Because there is more involved, it takes a little longer to close with an FHA 203k, expect 60 days, but it can be sooner. With these loans, the repairs are done after the closing.
Lack of responsiveness – One of the biggest frustrations when working with a foreclosed property is the lack of responsiveness from the bank. This is the classic hurry up and wait attitude. When the bank accepts the offer they will usually want to set a quick closing date. This makes sense, the quicker they can get the bad loan off the books the better. But often as part of the loan approval process, or whenever you need the bank’s sign off or approval, the clock starts to drag. It isn’t surprising that banks move slowly. Decisions are often made by committee or passed up the chain of command. Also, the REO staff at the bank is likely to be overwhelmed. They might have hundreds of properties they are responsible for, and only so much time in the day to deal with everything. So you could be waiting a while for them to respond. This might not make a difference if you aren’t on a deadline, but if you are planning on getting the home buyer’s tax credit, make sure you build in extra time, and don’t count on their meeting the closing date on the contract.
Lack of responsiveness often describes the listing agent in a foreclosure, too. The listing agent is the Realtor who is marketing the home for the bank. In a normal transaction, the listing agent acts as a liaison between the buyer and the seller. The problem (not in all cases) is that it is common for one agent to be responsible for up to 30 listings. This means they are spread so thin that they often don’t even return phone calls let alone help in moving the transaction toward the close.
Title issues – Another common problem with foreclosures is title issues. The title is the chain of ownership and guarantee that you own the property and no one else can claim the home after you close on it. In order to close, the new mortgage lender needs to prove that you have a clean title so they feel safe lending the money for the mortgage to purchase it. Each step of a foreclosure adds extra legal documents which need to show on the title. The bank handling the foreclosure is probably the servicer, not the actual owner of the property, and it is common to have the property transferred from one entity to another. All this extra paperwork means that it may take more time to sort everything out, especially if you are trying to get documents from the bank (see above).
Utilities – In order to close (unless you are buying with an FHA 203k loan where this is part of the repair estimate) the water, gas and electrical service all have to be turned on. Even something as simple as this can take extra time. If the utilities weren’t on when the home was appraised, we will need to do an inspection before closing verifying that they are on and everything is working properly. The bank holding the property won’t turn on the utilities until after you have full loan approval. Then it goes through the chain of command, while everyone else waits for something to happen.
Extra fees – Check the contract, but banks are now asking for the buyer to pay extra fees or to pay charges which are normally paid by the seller. I have seen cases where the buyer had to pay the state and county transfer taxes, even though these are traditionally considered seller paid items. These char5ges can add up to thousands of extra dollars for the buyer. But remember, everything is negotiable. If the deal is good enough it may be worth paying some of the seller’s costs or extra fees, but the bottom line is that the seller wants, and needs, to get rid of the home.
Penalties for not closing on time – The contract will also most likely have a clause requiring the buyer to pay a fee for everyday beyond the contract closing date. This is pretty logical. The buyer should have an incentive to make sure they aren’t dragging their feet and are working to get the home closed on time. But what happens when the delay is their fault?
The key to getting through the extra obstacles of a foreclosure, and getting it all done in time, is to work with experts who know the process and can help you steer clear. This means a good loan officer, a good Realtor, and a good attorney. You can find bargains with foreclosed homes, but be prepared to deal with some frustration and expect some bumps along the way. But the payoff can be worth the extra hassle.
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at very attractive rates. The last several weeks mortgage rates have been flat as the proverbial pancake. The markets have moved daily, but the range has held steady. Over the past week the employment report came in better than expected, which hit rates for the day, but they quickly bounced back. The stock market is strong, and today marks the anniversary of the bottom of the market last year. Since then stocks have climbed about 62%. The Fed has spent almost all the money allocated for mortgage bonds, and the program ends at the end of the month, either way. So it is still curious why rates are so low. The consensus view was that rates would start to rise in the first quarter. So whether the low rates are here on borrowed time, or not, they are here now, near the lows for the last year.
other states may be slightly different, give me a call in the stock market. The economic reports released over the last few days continue to be a mixed bag. Inflation continues to come in low, which is good news for keeping mortgage rates low, but there are also signs that the economy is gradually improving (or maybe a better description would be bottoming). In housing, residential spending was higher, a big surprise since this had been down for 9 months in a row, The inventory of homes on the market continued to rise, so no one expects a real pick up in new construction until the supply of homes stabilizes. Mortgage bonds continue to trade near the best part of their range, but the consensus is still that rates are likely to rise.
reasons is because buyers are lining up to buy in time to take advantage of the home buyer’s tax credit. Home buyers have until the end of April to get their new home under contract, and they have until the end of June to close. So there should be plenty of time to find a home, get a contract and close by the end of June, right? Maybe. But it depends. 
Do your home work – Find out what you can about the seller and their situation before making an offer. If you know what the situation is for all parties, you are in a better position to see if your offer is likely to come together.
investors buy stocks and mortgage rates usually trend higher. When fear is the dominant emotion mortgage bonds are more likely to benefit, because investors feel safer with a fixed return. Fear is in the air again, today. Over the last few weeks Greece was in the news as it looked like they were close to default. That crisis was band aided over, but now when people talk about Greek ruins, they are talking about the economy. Their credit rating was down graded yesterday, which means more trouble. Jobless claims came in slightly higher than expectations, which helps feed the fear. Another reason why the trend is for lower mortgage rates, is that Fed Chairman Ben Bernanke, in congressional testimony yesterday, said once again that rates will remain low for an extended period of time. But that talks about short term rates, not necessarily mortgage rates. The Fed has just over a month left on its bond purchase program, but for now that isn’t putting the hurt on mortgage rates. If you are looking to buy a home or refinance a mortgage, my guess is still that rates will be rising, so this is a time to take advantage of rates while they are still near the lows.
60 days away from the deadline for having your contract together for the $8,000 first time home buyer (or $6,500 move up buyer) tax credit. You don’t have to close your purchase by the end of April, you have until the end of June to get your mortgage and close. But, if you are planning on taking advantage of this credit, time is running out quicker than you might think. 
selling off and rates were headed higher with the fear that low mortgage rates were gone for good. But throw in a poor consumer confidence report and a good bond auction and we are right back where we were before. Mortgage rates are still in the same range we have traded in over the last several months, but the swings are getting bigger. For most people all this activity only changes the actual rate by a small amount, but the trend is what is worth watching. So for now, get them while they last, rates are trending lower now, but this may not last long.
inching higher. As always, the concern is inflation. The Producer Price Index (PPI) came in at an increase of 1.4% for last month, higher than the expected .9% increase, and in the Fed meeting minutes released yesterday some of the Fed governors marked their concern for an upturn in inflation. Inflation decreases the purchasing power of the dollar, and as mortgages are paid back over a long period of time, investors want a higher present return (higher yield) if they think they will get paid back with cheaper money. Right now, mortgage bonds have slipped through a key level of support (traders have been buying when it got near this point) and if we don’t see a bounce, this could be a sign that higher rates are coming. All the experts (well, most of them anyway) have been projecting higher rates as the Fed winds down its mortgage bond buying program, and this could be the start of that move.Then again, volatility is the rule, so all we need to see is a bad day in the stock market or a bad economic report and the trend could reverse again. But for now, rates are trending higher.
running shoes. While I expect that we will be in a buyer’s market for the rest of the year, for qualified buyers the best time to buy a home may be in the next 2 months. Not only is the tax credit ($8,000 after closing to qualified buyers) expiring for contracts put together by April 30th, but mortgage rates are projected to go up soon, too. 
a lot of information coming out over the remainder of the week, but today is a light day. The Empire State manufacturing index came in stronger than expected, and a measure of home builder confidence came in at the highest reading in months, though that isn’t saying much. These items are showing that there is some good news on the economic front, but good news for the economy is usually considered bad news for mortgage rates. That’s not the case today. The rate trend today is improving. We will see how everything shakes out as more information comes out later this week.