How To Buy Foreclosed Homes With No Money: Top 8 Tips

Foreclosure often begins when a homeowner falls behind on mortgage payments, typically due to job loss, medical bills, or mounting debt. After several missed payments, the lender takes action, reclaims the property, and lists it for auction.

On auction day, the air is charged with excitement as investors and first-time buyers crowd the room, all hoping to snatch up a deal. These homes often sell for far less than market value, with many bidders showing up ready to make a move.

You’re standing among them when your attention is suddenly caught by a property up for bid. It’s in a sought-after neighborhood, needs only a few repairs, and the starting bid is shockingly low. The opportunity feels too good to pass up, yet the real surprise is this— you could own that home without spending a single dollar upfront.

What Is a Foreclosed Home?

A foreclosed home is a property that the bank or mortgage lender reclaims after the homeowner fails to make their mortgage payments. Since the home was used as collateral for the loan, the lender has the legal right to initiate foreclosure when payments are missed. 

The process begins with the lender filing a Notice of Default with the county recorder’s office, formally notifying the homeowner that they are in default. If the homeowner cannot settle the missed payments through negotiation and the mortgage remains unpaid, the lender may proceed with a legal action, known as judicial foreclosure.

The lender will attempt to sell the home at a foreclosure auction. If there are no bids or if the highest bid is lower than the remaining mortgage balance, the lender takes ownership of the home. This is now classified as a bank-owned property or REO (Real Estate Owned) property.

After acquiring the property, banks and mortgage lenders are typically eager to sell it quickly. These properties generate no income and can be costly to maintain. If the property is not sold at auction, the lender will list it on the open market in an attempt to recover as much of the unpaid mortgage as possible.

Top 8 Tips on How To Buy Foreclosed Homes With No Money

Whether you’re an ordinary individual looking for a home to live in or a real estate investor wanting to earn extra money, you’ll have the opportunity to purchase a home when it enters the foreclosure process.

One way is through a short sale, where the homeowner sells the property for less than they owe, with the lender’s approval. Another method is bidding at a foreclosure auction. In New Castle County, Delaware, for example, you are required to pay a  20% deposit immediately  (e.g., $30,000 on a $150,000 property). 

The remaining balance is due by the third Monday of the following month, with a $500 late fee for missed payments. Moreover, as the winning bidder, you must pay a $10,000 certified deposit as a registration fee in order to receive a Sheriff’s foreclosure sale. All payments must be made via a cashier’s check or money order.

Now, here’s the big question: how to buy foreclosed homes with no money? You might be thinking if that’s even possible. The truth is — yes, it can be. With the right loans, deals, and strategies, you can finance the purchase with little or no out-of-pocket expenses needed upfront.

Let’s say you’re worried about how much a foreclosed home you can afford on a $60K salary, these tips will help put your mind at ease:

1. Secure a Hard Money Loan

If you’re exploring how to buy foreclosed homes with no money, consider using a hard money loan. These short-term loans are issued by private lenders who care more about the home’s market value than your credit score to protect their investment.

Expect to pay higher interest rates, typically ranging from 10% to 15%, and you must repay the full loan balance within 6 to 12 months. Because of this, most buyers refinance with traditional loans shortly after purchasing to avoid the high-interest costs.

Research lenders who understand your local market to qualify for a hard money loan. You can connect with them through experienced real estate agents or attorneys with local knowledge. Before applying, gather detailed information about the home, such as its value, condition, and occupancy status.

Generally, lenders require a down payment of approximately 20% to 30% and expect you to show proof that you can make the monthly payments. You might also need to explain how you plan to repay the loan, whether through refinancing or selling.

While hard money loans offer speed and flexibility, they come with high costs and short terms. Use them strategically when time is critical, and refinancing is planned.

2. Take a Personal Loan

A personal loan can be a smart way and another answer to your question: how to buy a foreclosed home with no money. Especially if you have a good credit score and history, this is a good option. 

These loans provide quick access to funds without requiring collateral. Interest rates range from 8.99% to 18%, and terms typically span three to five years. However, most personal loans are capped at $50,000, which may not cover the entire cost of the property.

Credit unions may offer attractive rates but often have eligibility requirements, such as a small membership fee or restrictions based on military affiliation or residence in certain areas. Personal loans from credit unions can be processed faster than hard money loans, making them a convenient choice for quick funding.

Also, it’s important to approach personal loans carefully—borrowing more than you can afford to repay can lead to a debt trap. Check carefully the interest rates, amounts of fees, monthly payments, and other requirements. Be sure to evaluate your budget and repayment plan before committing.

3. Try Peer-To-Peer Lending Platforms

How to buy foreclosed homes with no money? Online peer-to-peer (P2P) lending platforms can provide you with a solution. These platforms connect you with individual lenders who may fund your loan. 

The interest rates, down payments, and documentation requirements can be similar to those of hard money lenders, but they vary based on the lender or lending group.

However, unlike hard money loans, P2P lenders typically can’t finance expensive homes. For instance, Lending Club caps loans at $50,000. On the plus side, P2P lending can provide fast access to funds, with Lending Club offering loans in 48 hours.

4. Use Proceeds From Your Home Equity

If you already own a home, you can tap into its equity through a home equity loan or a home equity line of credit (HELOC). These funds can help finance the purchase of a foreclosure property. Home equity options often provide higher borrowing limits and more competitive interest rates than peer-to-peer loans. 

For example, Bank of America offers a starting rate of 6.49%, which may rise to 8.90% after six months. A HELOC can work well for short-term financing, especially if you have a clear plan to repay the balance quickly. 

However, remember that your home secures the loan, so missing payments could put your current residence at risk of foreclosure.

5. Take Advantage of Government Loans

Whether you’re planning to buy a bank-owned, foreclosed home or a short-sale home, a Federal Housing Administration (FHA) loan can be an excellent option, especially if you have a lower credit score. 

These government-backed loans are specifically designed to help owner-occupants—people who plan to live in the property. They are not intended for investors or house flippers who purchase properties to renovate and sell for profit.

FHA loans offer more lenient underwriting standards. With a score of 500, you can still qualify for a mortgage with a 10% down payment. If your score is 580 or higher, you can secure the loan with a minimum down payment of just 3.5%. 

This flexibility is particularly beneficial if you’re considering how to buy foreclosed homes with no money, as FHA loans make homeownership more attainable even with limited savings. Plus, this option can help save money when building or designing a house, making it easier to invest in your future home without needing substantial upfront capital.

6. Capitalize on Renovation Mortgage

A renovation mortgage allows you to combine the cost of buying a foreclosed home with the expenses of needed repairs into one loan. Fannie Mae’s HomeStyle Renovation Mortgage supports this financing, making purchasing and renovating a house possible with a single application.

Before approval, you must hire a licensed contractor to submit a detailed renovation plan and cost breakdown. The lender places the renovation funds in an escrow account and doesn’t release them to you directly.

You can receive up to 50% of the funds at the start to cover initial costs like materials, permits, or architectural fees. As each phase of construction is completed, the lender releases additional funds. After the renovations are done, an appraiser must verify that the work meets the agreed standards.

You’ll generally need a credit score of at least 620 to qualify. Borrowers with substantial income and excellent credit may only need to make a 5% down payment. You can spend your money on any permanent improvement to the property.

7. Get a Conventional Mortgage

Perhaps you’re asking, how to buy REO properties with no money? Here’s a simplified guide. REO (Real Estate Owned) properties are bank-owned homes that didn’t sell at foreclosure auctions. Such properties might have been left abandoned, damaged by fire or water, or even vandalized.  This makes buying a foreclosed property risky, and lenders typically won’t finance homes in such poor condition.

However, if the property is in good condition and livable, you can typically buy it using a traditional mortgage from a bank, credit union, or mortgage lender. To increase your chances of success, get pre-approved for a mortgage early on. 

That way, you’ll be ready to make a strong offer as soon as you find a promising property, before other buyers who can pay in cash get to it first.

However, there’s a risk with this strategy. If there are delays in closing or funding your loan, you might have to come up with the full purchase price on short notice, possibly by turning to more expensive or riskier financing options. 

So, if you’re thinking about how to buy foreclosed homes with no money, make sure you’re confident your lender will follow through and be ready for any unexpected delay.

8. Assume the Seller’s Loan

Loan assumption completes our list of strategies on how to buy foreclosed homes with no money. 

This process involves taking over the seller’s existing mortgage, including its terms and interest rate. Essentially, you are stepping into the previous homeowner’s position and continuing their mortgage payments as if they were your own.

This can be a feasible approach on how to buy foreclosed homes with no money, especially if the existing loan doesn’t require a down payment. However, note that not all mortgages are assumable. Most conventional loans, for instance, typically require the full loan balance to be paid off before the property can change hands.

Additionally, even for assumable loans, lenders usually evaluate your credit score, income, and debt-to-income ratio before approving the assumption.

FAQs

What Is the Cheapest Way To Buy a Foreclosed Home?

One of the most affordable ways to buy a foreclosed home is by purchasing it directly from the bank or lender as a real estate-owned (REO) property. Banks are often eager to sell these properties quickly to minimize their losses, which can lead to competitive pricing. Furthermore, if an REO property has been on the market for some time, banks may be open to negotiating the price to make a quicker sale.

Do Foreclosed Homes Have To Be Paid in Cash?

Are foreclosures cash only? No, you don’t always need cash to buy a foreclosed home. While foreclosure auctions typically require payment via cash or a cashier’s check, foreclosed homes sold by banks (REO properties) or through short sales can usually be purchased with a mortgage.

Can You Live In a Foreclosed Home for Free?

You cannot live in a foreclosed home for free. Once a home is foreclosed, the bank or the party that purchased it at the foreclosure sale becomes the legal owner. If you remain there without a lease or permission, you’re considered a trespasser. The bank will likely start eviction proceedings to remove you from the property.

How Much Down for a Foreclosed Home?

The down payment for a foreclosed home can vary depending on the type of loan you obtain. For instance, Federal Housing Administration (FHA) loans may require as little as 3.5% down, while conventional loans typically demand anywhere from 3% to 20%. Veterans and active-duty service members may also get the advantage of a zero down payment with Veterans Affairs (VA) loans.