3.2 min read
An REO property or bank-owned home is a property where the entity granting a mortgage to a borrower has repossessed the property. It is probably due to the borrower defaulting on mortgage repayments.
The bank has either foreclosed the property by buying it at auction or has made arrangements with the borrower to repossess it. The lender will have cleaned up the land title. Ensured no liens or encumbrances, obtained vacant possession by evicting the borrower or any tenants and undertook essential repairs before securing the property. It differs from a foreclosed property being sold as-is with the buyer responsible for dealing with such issues.
Accordingly, there should be no reason that a mortgage cannot finance a bank-owned or REO property. Indeed, Wells Fargo says approximately 60% of its REO homes are purchased with financing.
So from where is financing obtained?
Financing REO properties typically are arranged via two types of REO loans: conventional mortgages and "hard money" loans, but there are others.
Several commercial banks, and various government-sanctioned companies such as Fannie Mae, work with local mortgage lenders to offer attractive options on traditional loans. Some of these offers down payments from as little as 3% and concessionary mortgage interest rates for at least the first few years of a mortgage;
Finance might be available just as for a traditional home purchase if a foreclosed property is in reasonable condition with a clean title. Also, the borrower has a good credit history and a reliable income source. The home's condition can influence eligibility for the loan and loan amount, whether the property will be used as a primary residence or if it's being purchased as an investment.
The terms and conditions relating to loan duration and interest rates will, of course, vary according to the property and your circumstances but generally. REO loan rates might be between 4.5% to 12% for 1 to 30 years.
"Hard money" lenders
They can also help provide finance for REO properties. These may be private investors or finance companies that specialize in delivering, usually relatively short-term, finance for property acquisitions. Sometimes such loans are called "bridging loans" as they "bridge" a short period. Because of this, they usually attract a higher rate of interest than that applicable to a longer-term loan.
Other sources of finance
Government-backed loans ("FHA loans") may be available, especially for first-time home buyers and buyers who haven't purchased a home in the last three years. These loans have lower requirements regarding down payments and more relaxed requirements on credit and debt-to-income ratios.
The FHA also offers the so-called "203(k) renovation loans," federally insured. It can guarantee loans from private lenders participating in the program by charging borrowers a mortgage-insurance premium. These loans may be ideal for REO properties as they provide funds for the purchase and any major renovations that may be required if the property has fallen into disrepair or needs modernizing.
In addition to national home funding programs, some state and local governments offer assistance to, primarily, first-time or other home buyers in a specific location or who work in critical sectors of the community.
These loans have similar terms of lower down payments and subsidized mortgage interest rates as with FHA loans, but the exact terms and conditions vary according to the state or local government;
For example, the US Department of Agriculture ("USDA") also offers a program that mainly targets rural dwellers. These concessions are primarily provided to encourage people to stay, live and work in rural areas.