Must Know Financing Options For An REO Property

One day you find a house selling below market value and comes free of liens and back taxes. It needs a new roof, but you decide this real estate-owned property, or REO, is a decent investment.

But before you start buying shingles, know that financing REO properties can be different than financing a traditional home.

What’s an REO? 

An REO is a house that has been foreclosed on and was unable to sell at auction. When the lender reclaims the home and wipes out any money due on the mortgage, it offers the property for sale as an REO. The property is usually sold as-is, even if it needs repairs to be live-in ready.

Some people choose to buy an REO as a primary residence, while others might use an REO as an investment vehicle. They repair and update the property, then resell it at a higher price—or rent it out.

Interest-Only Loans

Someone who does not intend to live in an REO—but buys it as an investment—may want to use an interest-only loan. With this option, you only are only required to pay the loan interest each month, usually for a period of five to 10 years before you must begin paying off the principal. There are some pros and cons to using an interest-only loan with an REO.

Pros:

• Less initial monthly payments, allowing you to invest saved money into the property
• Flexibility to pay the interest on bad months and the principal plus the interest on good months, if needed depending on tenants

Cons:

• Without careful planning, you could be stuck with high payments and no savings
• Your principal won’t go down if you only pay the required installments over the interest-paying period

If you decide to resell the home, then the profit can be used to pay off the loan’s principal, of course.

Possible Difficulties

Those who choose to buy an REO may have a hard time finding financing, since lenders may be reluctant to provide mortgages for homes in very poor conditions—like those without electricity or a needing a kitchen. Keep in mind if your REO requires extensive repairs, the bank will likely require a larger down payment.

Your credit history and your intent can also affect mortgage rates. Some lenders may see REO investors—those who don’t live on the property—as a higher loan risk and adjust their rates accordingly.

Some lenders offer mortgages that include money for repairs. Two examples are Fannie Mae’s HomePath loan and an FHA 203(k) loan. Both are intended to help buyers with fixer-uppers.

Original Article From www.realtor.com | Written by: Craig Donofrio