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Cash-only for foreclosures?!

By Polyana da Costa ·
Wednesday, July 18, 2012
Posted: 11 am ET

"Cash only!" These are the last words a homebuyer wants to hear after choosing a home.

First-time homebuyer Jaime has heard that twice and wants to know why.

"I am in the hunt for my first home. The process has been agonizing because the scenarios have been so strange, but a learning process. I looked at a property with my Realtor. She says she was told I would not be able to finance the property through Fannie Mae (It's a Fannie Mae-owned home, or REO). I spoke with the listing agent and the agent says there's no such thing -- the property qualifies for financing. My agent has made the comment again on another property that Fannie/Freddie is not financing a property, meaning cash only. How can this be? What scenarios would it take for Fannie/Freddie to mandate cash only? I am confused and irritated because in my area inventory is low."

As I read Jaime's question, I can't help to think of my homebuying experience two years ago.  Like Jaime, I went through the agonizing process of buying a home from Fannie Mae. Yes, it was confusing, frustrating and irritating, as Jaime describes. But I got such a great deal on my home that looking back, I think it was worth it.

I started my house hunt with a not-so-helpful real estate agent, but I quickly found a more knowledgeable one that could provide better service.  I don't know if that's the problem in Jamie's case, but I find it strange that the agent is saying a Fannie Mae property isn't eligible for a Fannie Mae mortgage.

Unless the home is missing a kitchen or has excessive damage, Fannie Mae should not only give you a mortgage to buy a home owned by them, it will give you great incentives to do so. Fannie Mae offers a little-known mortgage program on its foreclosed homes, called HomePath. Homebuyers can get a HomePath loan with as little as 3 percent down and won't be charged mortgage insurance, which will save a significant amount of money. With a HomePath loan, the lender does not have to order an appraisal of the home, which makes the loan process quicker and cheaper. The only concern here is you have to make sure you are not overpaying for the home, since there will be no lender-ordered appraisal.

Even if you are buying a Fannie Mae-owned home that needs repairs, you can try to can get a HomePath renovation mortgage, which can provide some extra money for remodeling.

It's important to remember that Fannie Mae is not a direct lender. You have to find a lender that offers HomePath loans. That lender will later sell your mortgage to Fannie.

Another plus for noninvestor homebuyers buying from Fannie is that they get first dibs at the home for the first 15 days after the home is listed. That means as long as you submit your offer during those 15 days and it meets Fannie's requirements, you won't have to worry about competing with investors, who often are cash buyers.

Also note that HomePath mortgages can be used only to purchase  homes from Fannie Mae.

Don't confuse Fannie Mae with Freddie Mac either. Freddie Mac properties are not eligible for this special program. If the home you looked at belongs to Freddie Mac and needs repairs, it would probably be a cash-only deal. But if the home is in good shape and meets the lenders requirements, I don't see why you couldn't get a conventional mortgage (that would be later sold to either Fannie or Freddie).

I wrote this story last year about HomePath mortgages that goes into more detail about the program and why it's great for homebuyers. And if you are thinking about buying a foreclosed home owned by a bank, these tips can help you get the best deal.  

Follow me on Twitter @Polyanad

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July 19, 2012 at 1:43 pm

Thank You. It makes better sense now.

July 18, 2012 at 6:04 pm

Jaime, I totally understand your frustration. Getting a mortgage for a condo can be complicated if there are too many investors/renters in the building. The theory is investors are more likely to default on their mortgages than owners who live on their property. If half of the owners stop paying their mortgages and the association fees, your dues will go up and your property may lose value because the building won't have enough money to properly maintain the common areas.
Still, HomePath lenders make exceptions on condos. They are much more likely to give you a loan a lender who doesn’t offer HomePath. So yes, you can probably get a HomePath mortgage to buy this property but you have to ask yourself if it's worth the risk. And if you think you'll need to resell the condo anytime soon, consider the fact that potential buyers won't be able to get a mortgage to buy it from you. I recently wrote a story about things you need to know before buying a condo. Maybe it will help you decide.

As for the contract you lost over the appraisal issue, I'm assuming it wasn't a HomePath loan because they shouldn't ask for appraisals on those. Low appraisals kill a lot of deals these days. And yes, the Homepath loan may have slightly higher rates but remember you won't have to pay for mortgage insurance here. Unless you put 20 percent down, you will pay for mortgage insurance with other types of loans.
Good luck with your search!

July 18, 2012 at 4:08 pm

Hi Polyana. Thank you so much for addressing this in your blog.The property is a condo, I am not sure if this makes a difference? I was told my bank would have to do a questionaire to see if the association was financially fit to lend. The concern was that even if i did homepath which would take the risk., the financial state of the association would not be good for me because there was a 50% owner to renters?? I can not begin to tell you the crazy things I have experienced since my home search started last October. The rules change constantly. I am not quite sure which part of the equation is wrong, but I know my biggest problem has been having reliable and trustworthy representation. Sad to say I have lost trust.
I placed an offer on a Fannie Mae property and lost the contract because it did not appraise and the agent refused to negotiate even though i offered 5000 dollars more over, because I offered based on comps in the same development, the appraiser just did a very bad job....he basically killed the deal. At the time I refused to pay a higher interest rate with Fannie Mae and pay 10,000 dollars over appraisal.
I will not give up though. Thanks again.