What You Need to Know About REO Property Financing

Although it’s true it can be harder to find financing for Real Estate Owned (REO) properties compared to regularly listed properties, the banks owning them are very motivated to sell – especially if they own other properties in the area.

Research shows that vacant properties reduce taxable value in the neighborhood – not to mention that even abandoned properties need some maintenance, which may include fees for the upkeep of common areas like elevators, parking lots, and gardens. For that reason, banks are often looking to find a buyer quickly.

According to Attom, out of all the home purchases (with intent to flip) in the fourth quarter of 2022, external financing accounted for 34% of all successful offers from homebuyers. Cash-only and other types of offers accounted for the rest.

Regarding real estate, cash offers remain king, but looking for external financing and preapproval letters can make up for it. Without further ado, here are the best ways to finance your REO property purchase:

Mortgage

If you have a good credit score, a mortgage is our top recommendation and the easiest way to finance an REO property purchase. A mortgage is a type of loan where the property serves as collateral in case of default. If you apply for a mortgage, you’ll need to make interest payments throughout the life of the loan and pay back the principal in installments.

Mortgages tend to have the lowest interest rates compared to some of the alternatives we listed. You can expect interest rates ranging from 6.79% for a 10-year loan to 7.61% for 30-year term loans. These numbers may vary slightly depending on the market conditions.

The main downside of financing an REO with a mortgage is that banks are unlikely to approve a mortgage for a distressed REO property – that is, a property that needs a large investment to make it habitable or sale-ready. In that case, you’ll need to look for alternatives.

If you have a good-to-excellent credit score (670+), you can get your mortgage approved within 2-8 weeks.

Pros

• Reasonable interest rates and refinancing options
• Choose between a fixed rate and a variable-rate interests
• Lower interest rates than personal loans and other financing options

Cons

• Long approval timeline
• Require a good credit score to apply

Hard Money Loan

Hard money loans are a type of short-term loan where you use your property – or property equity – as collateral. Hard money loans usually have terms ranging from 6- to 36 months and have one of the funding times – between 7 and 10 days.

Since you’re using a hard asset as collateral, hard money loans don’t require credit checks or any kind of background check. Hard money loans are ideal for people with low credit scores or people looking for quick approval times. The LTV ratio for hard money loans is between 60%-75% of the value of the collateral.

It’s important to note that most hard money loans come from individuals or private companies – banks and other financial institutions deem them too risky to invest.

The major downside of hard money loans is the interest rates. Interest rates range from 10%-18%, and the loan terms are usually between 6- and 36-months.

For house flippers, these long-term high interest rates are less significant. The reason is that you’ll sell the renovated property quickly and pay back the loan as soon as possible, minimizing how much you pay in interest.

The main appeal of a hard money loan is the speed, but we only recommend it for house flippers and short-term investors. If you’re looking for a loan to stave off foreclosure, you’ll be better off looking for a mortgage with lower interest rates.

Pros

• No credit requirements and no background checks
• Very short approval times (7-10 days)
• Loan terms are perfectly suited for house flippers and short-term investors (between 6-36 months)
• LTV between 65%-75% of the value of the collateral

Cons

• Very high interest rates (between 10%-18%)
• Your property is used as collateral

FHA Loans

Federal Housing Administration loans – also known as FHA loans – are government-backed insurance that offers potential lenders insurance on any loan they make; this makes it so they can provide you – the borrower – better deals with lower down payments and closing costs.

FHA loans are very popular among first-time homebuyers and house flippers, but they come with a caveat – you can’t purchase a home using an FHA loan if it was sold to the current owner within the last 90 days. Furthermore, if you acquire the property and someone wants to buy it with an FHA loan, they’ll have to wait another 90 days after you gain ownership it. This only applies to buyers financing the purchase with an FHA loan.

Other than that, FHA loans are a great option to finance an REO purchase. FHA loans don’t require a high credit score; even if you have a credit score as low as 500, you can apply for this loan. However, you’ll be required to pay the REO property a 10% downpayment.

If your credit score is 580 or higher, you’ll only need to make a downpayment of 3.5% of the total cost of the property.

According to the official FHA website, in 2023, the nationwide mortgage limit is between $472,030 and $1,089,300, and interest rates range from 6.0%-7.5%, depending on the loan terms. In general, the longer the time, the more interest you pay.

Pros

• Low credit score requirements
• Reasonable interest rates (6%-7.5%)
• No hard income limitations to apply
• Approval time between 30-45 days 

Cons

• You have to make a 10% downpayment if your credit score is below 580
• You can’t buy a property that was sold within the last 90 days
• Buying a home with an FHA loan requires lengthy inspections, which can harm your chances of securing an REO 

Home Equity Loans

Home equity loans are a type of loan you can take against the equity you have in another property. You can then allocate this loan to purchase a new property – an REO. Equity loans are a very common way to finance a house if you want to flip it for a profit.

Home equity loans are similar to mortgages in that the collateral is the equity you hold in your property. Note that for these types of loans, you need between 15%-30% of the equity in your home, and the LTV ratio is usually between 80%-90% of the home’s value.

Home equity loans have interest rates similar to FHA loans, ranging from 6.5%-7.5% and 10-, 15-, 20-, or 30-year terms. The recommended credit score to apply for a home equity loan is at least 680. The higher your score, the more likely the bank or financial institution will approve your loan. Approval periods range from 2 weeks to 2 months.

Pros

• Short approval time if you have a good credit score
• High LTV ratio
• Reasonable interest rates (6.5%-7.5%)

Cons

• If you fail to pay your loan back, you risk foreclosure on the property used as collateral
• Require 
• You’ll need a good credit score (680+)

FAQs

What Are The Pros And Cons Of Buying A Bank-Owned Home?

The three most significant benefits of buying REO properties are:

• Unbeatable price 
• No tenants or homeowners involved
• No liens on the property

The three most significant downsides of buying an REO property are:

• Properties are sold ‘as is’
• Competitive market
• In some cases, it can be difficult to find financing

Is It A Good Idea To Buy A REO?

Yes – whether you’re looking for a primary residence or for a profitable investment, REO properties are excellent options. As with foreclosures, REOs need significant repairs and are rarely move-in ready.

How Do I Find REO Properties In My Area?

All REO properties were foreclosed at some point, so a good starting point is to visit local auctions and keep track of properties that failed to sell. You can also check local newspapers, contact professional real estate agents, or check specialized foreclosure websites.