How do you pay for it?The biggest challenge in foreclosure investing is the money issue. Riskier, subprime and "creative financing" loans from most lenders have disappeared. There are some perfectly legal techniques still available, including subject-to deals and lease-option and lease-purchase transfers, but these are risky because of "due-on-sale," or DOS, clauses in many existing mortgages. Keep in mind that while DOS clauses are common, they're not universal. Mortgages written prior to the 1980s, for example, commonly do not contain them.
Financing options include
|•||Conventional financing.||•||Opening a line of credit.|
|•||Borrowing against existing equity.||•||Enlisting a partner/investor.|
- Conventional financing. If you have good credit, this may be an option. However, some lenders are hesitant to finance foreclosure purchases.
- Borrowing against existing equity. You can get a mortgage (or a second mortgage/home equity loan) on other property you already own. These are generally a specified amount at a fixed rate. This may be easier than getting a loan for the foreclosed property, but the ongoing credit crisis has caused a great deal of tightening in the home equity lending market too, so this isn't as easy as it was just a year ago.
- Opening a line of credit. Usually adjustable-rate loans, these, too, are becoming harder to find because so many homeowners are having trouble meeting their first-mortgage obligations that lenders are reluctant to extend secondary loans. You will need to have high-value collateral (such as property in good condition). The advantage of this route is that you only borrow money when/if you need it, but it is available on short notice, which can come in handy for auction purchases.
- Enlisting a partner/investor. This can be a great move, if you can find a partner with deep pockets. There are many investors out there who would like to profit from foreclosures, but don't want to do the hands-on work.