Auction Financing: Can You Use a Mortgage at an Auction?
Posted by Gary Ashton on Wednesday, April 26th, 2023 at 1:47pm.
While auctions can provide a way to purchase foreclosures at lower prices, the foreclosure process typically involves selling properties as-is without any home inspections or appraisals. However, many lenders require buyers to have an inspection and appraisal to take out a mortgage.
Buying a home at an auction involves less competition with other buyers than traditional home purchases, but financing real estate from an auction differs from buying a house the traditional way. Those planning to buy a home at an auction must explore other ways to finance this real estate purchase.
Buying a House at Auction
Buyers interested in purchasing a home at an auction should carefully review financing options while creating their budget. Some options come with added costs, such as interest, which can lead to a higher price overall. For other financing options, buyers must meet specific requirements to be eligible.
Knowing more about different types of financing for purchasing a foreclosure can help buyers determine the best choice for their situation. The following are some ways buyers can finance a house at an auction.
Cash-out refinancing allows buyers to purchase a home and take out equity from the property immediately. In this case, buyers pay for the home at an auction, then refinance afterward. They can then use this equity to repay the borrowed money to purchase the home.
A cash-out refinance involves getting an inspection and appraisal done on the property. Therefore, this financing option might not be suitable for houses in poor condition.
Home Equity Loans
Home equity loans offer a way for current homeowners to finance a home purchase at an auction based on equity. Buyers with enough home equity can apply for a home equity loan and use this money to buy a foreclosed home. These loans usually provide higher amounts than hard money, personal, and other types of loans. They also tend to have lower interest rates and longer repayment terms.
Buyers should remember their current home is used as collateral for a home equity loan. Failing to make payments on this loan can lead to foreclosure.
Banks, credit unions, and other financial institutions sometimes offer personal loans for those who meet eligibility requirements. This is usually based on a borrower's credit score, credit history, income, or other means of repaying the loan.
Personal loans typically do not require any collateral from borrowers. The terms and conditions of these loans vary from lender to lender and usually have longer terms for repayment than other financing options. However, some have high-interest rates. Those planning to purchase a home at an auction can usually receive funds quickly with a personal loan.
Hard Money Loan
Hard money loans offer a fast way to finance a real estate purchase at an auction. The approval process is generally quicker than the approval process for home equity loans and other financing options. However, hard money loans also tend to have higher fees and rates, which can significantly increase the overall cost of an auction purchase.
Hard money loans have a low loan-to-value ratio, which might require buyers to come up with a higher amount for a down payment. The amount of these loans depends on the value of the foreclosure.
Peer-to-peer (P2P) lending provides another quick way to finance a home at an auction. This type of lending involves using platforms that help buyers find individuals or groups to loan them money. P2P lending can have higher down payments and rates, just as hard money loans do. However, exact terms vary from lender to lender.
This type of lending might not be available for foreclosures with higher price points, and some P2P lenders have limits on the amounts they can finance. Buyers approved for a P2P loan can usually receive the money in a short amount of time.
Purchasing a home at an auction with a traditional mortgage can be done sometimes, although it's unusual. Conventional mortgages typically take at least 30 days to process. Depending on the auction date, those buying a foreclosed home might need to secure this money sooner.
Using a traditional mortgage for an auction purchase involves finding a lender who can process it in a shorter timeframe. Another option for those who want to use a conventional mortgage is purchasing a foreclosure from a bank that provides a longer timeframe for payment, such as several weeks instead of a few days.
Buy With Cash
Purchasing a home with cash allows buyers to pay for it upfront. Buyers must show they have the funds to buy a home at an auction. In some cases, buyers must show that they have secured funding to make a bid on a property. Paying with cash means that this funding is already secured.
Using cash for these purchases helps buyers avoid paying more in the long run due to interest rates and other fees. Buyers can typically pay for a home with cash, a cashier's check, or money order.
Consider Your Options for Financing Your Home Auction Purchase
While less competition and lower prices are some benefits of purchasing a home at an auction, buyers must consider their financing options carefully as they can differ from the traditional home-buying process. With the proper research for their situation, they can choose from several options to best fit their needs.
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