Can I Finance a Home Bought at Auction?

There is a general misconception that homes bought at auction cannot be financed. The overriding expectation is that such a purchase may have to be in cash.

However, the US government actively supports homeownership and encourages lenders to offer mortgages to qualified lenders wherever possible.

A high proportion of property purchased at real estate auctions is paid for in cash, even though many buyers do have financing options. Most potential owner-occupiers will try to arrange for finance. They often only have enough for a deposit or initial down payment. On the other hand, investors who are running a business that involves buying and selling a property might only plan to hold a property relatively short term. Therefore, they may be content to pay cash.

What Options of Funding are Available?

Depending upon your objectives and status (i.e., owner occupier or investor), there are several ways in which funding may be secured:

  • Borrow the cash from "hard money" lenders, such as private investors or finance companies. Such entities specialize in providing, usually, relatively short-term finance for property acquisitions. These types of loans are sometimes called "bridging loans" as they "bridge" a short period and typically attract a higher rate of interest than that applicable to a longer-term loan;

The two main types of mortgage loans available are loans backed by the government and so-called conventional loans, which are not.

Government-backed loans ("FHA loans") may have lower requirements regarding down payments and credit and your debt-to-income ratios. First-time home buyers or people who haven't purchased a home in the last three years may qualify.

  • Suppose you are a first-time buyer and intended owner-occupier. In that case, it may be possible to participate in one of several state programs created by the US government specifically to help new buyers. Under such schemes, tax concessions may also be available to buyers. In some cases, the government will also help with the 10% deposit needed to move forward with a purchase.

Before the auction, loans must be approved "in principle" up to a maximum approved amount. This will allow the buyer to bid for a property knowing that the funding has already been approved. All he now needs to do is secure the property!

  • Loans are also available for buyers from specific niche sectors of the community. These may be for people who are considered to serve the community, such as police or fire officers, medical or emergency workers. Then there are loans for current or former military officers and, in another category, qualified people designate rural areas.

How Much Can Be Borrowed? 

Such an amount depends on the policies of the lender. However, a general rule of thumb is that buyers will be able to borrow about 4-4.5 times their gross annual income. Such amount is before deductions for tax and any other expenses.

But there are also other limits applied. A lender will probably not grant a mortgage of more than 80-90% of the property's value. There is also a limit that states that mortgage repayments should not exceed around 28% of a buyer's annual salary.