The crowds, the fast-talking auctioneers, the large amounts of money being bid: Auctions are exciting no matter what’s for sale, and when it’s a house up for auction, then it’s no wonder that foreclosure auctions can capture the imagination of many a home shopper. Those shoppers can, after all, potentially save a significant amount of money by buying a foreclosed home at an auction. But the reality of buying a house at auction typically means you’ll need lots of money in the bank (like, enough to purchase the thing outright), and that can be enough to bring your foreclosure auction dreams crashing back down to earth.
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The truth is that buying a home at auction is different from buying one the conventional way. And one of the biggest differences is that auction sales are almost always for cash.
However, there are ways you can acquire a home at auction, even if you don’t have the entire amount in your savings account. Here are seven ways to buy a home at auction without cash.
1. Get a hard money loan
Hard money lenders are financial institutions that lend money to people with less than stellar credit or complicated finances in order to buy assets such as real estate. Hard money lenders will extend a loan secured by real estate and just like a normal mortgage, if the borrower doesn’t pay it back, the lender can seize the asset.
Hard money lenders aren’t as concerned about things like credit scores as other lenders because they charge significantly higher interest rates over a shorter period to help offset the increased risk of the loan.
These lenders do look carefully at the asset — in this case, the house — securing the loan. The lender will consider the market value and condition of the house to make sure they feel it is valuable enough to secure the loan (i.e. they think they’ll still be able to make a profit if you default).
A hard money loan will often work for homebuyers at auction because hard money lenders are often willing to move fast. A hard money lender can often provide you with funds to complete a purchase in days instead of weeks or months.
There are downsides to hard money loans, however. For one, they usually have significantly higher interest rates than conventional mortgages. A hard money loan is likely to charge 10% to 15% interest.
Also, these loans are for much shorter terms. Typical hard money loans are only between 6 and 12 months. After that time, the lender will expect you to pay off the entire balance. For these reasons, homebuyers who buy with hard money loans generally refinance their purchases with conventional mortgages within a few months.
To get a hard money loan, research local lenders to find one that understands your local market. You can do this by talking to knowledgeable real estate agents or attorneys.
Next, you’ll have to provide the lender with details about the home that will secure the loan. This means researching the home before the auction and providing the lender with information on its market value, any information you can get on its state of repair, current occupancy, and other details.
You’ll also have to make a down payment, typically 25% or so. And you have to show you have the cash on hand to make the payments for the life of the loan. You may also need to explain what will happen when the loan’s term is up, whether you’ll refinance the home or sell it.
Once you satisfy the hard money lender’s requirements, you can obtain the cashier’s check you will need to settle the bill after the auction.
2. Use peer-to-peer lending
Online peer to peer (P2P) lending platforms connect borrowers with individuals who may loan money. The interest rates, down payment, security, and information requirements may be similar to hard money lenders. However, they can vary widely according to the individual lender or group of lenders.
One difference with hard money lenders is that P2P lenders are unlikely to be able to finance the purchase of a very expensive home. Prominent P2P platform Lending Club, for example, has an upper limit of $50,000 for a loan to purchase a home.
However, P2P lenders can produce money fast — in the case of Lending Club, in as little as 48 hours.
3. Use your home’s equity
If you already own a home, you may be able to use your home’s equity to secure a home equity loan or line of credit. Then you can use the proceeds of the home equity loan to pay for your foreclosure house won at auction.
Home equity loans can provide much more cash than P2P loans and also offer more attractive interest rates than hard money lenders. Bank of America, for instance, offers a home equity loan with an initial starting rate of 7.49%, rising to 9.9% after six months.
Home equity loans can also be held for much longer terms than hard money loans, so you won’t have to refinance quickly.
The big risk with a home equity loan, however, is that your current home is providing the security for the loan. If you don’t make the required payments on the home equity loan, your own residence could wind up in foreclosure.
4. Get a personal loan
A personal loan is one that you get on the basis of your credit history, credit score, and ability to repay loans. You can get personal loans from many sources, including online lenders, credit unions, and banks.
Credit unions often have attractive terms but may require you to pay a nominal membership fee, live in a certain region, or belong to a certain group (such as a member of the armed services) in order to borrow.
Credit union personal loans have longer terms than hard money loans, typically three to five years. The rates are similar, from 8.99% to 18%. However, you may have trouble borrowing enough with a personal loan to pay for your entire auction purchase, as the limits typically top off at $50,000.
On the plus side, you can get funds from a personal loan quickly. And you generally won’t need to put up any collateral for security.
5. Get a fast mortgage
In very rare cases, you may be able to fund a foreclosure purchase with a conventional mortgage. It will depend on finding a lender who can move much faster than the typical 30 days or so it takes to fund a conventional mortgage or buying a foreclosed home from a bank that gives you weeks instead of days to come up with the cash — or both.
The risk with this approach is that if there are delays in closing and funding the loan, you may have to come up with all the cash on short notice, perhaps by using a more expensive or riskier approach. It requires confidence in your lender to commit to buying a home at auction with funds from a conventional mortgage.
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