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Is It Risky to Buy a Foreclosure Home?

The savings can be great, but mortgage red tape may drive you crazy

Q. I'm in the market to buy a foreclosure house. Will I have trouble getting a mortgage?

A. Buying a foreclosure can save you thousands of dollars. Recent housing data show that more than a quarter of all real estate purchases involve foreclosed-on properties.

See also: State-by-state interactive map of home foreclosures.

Hidden and secret fees when buying foreclosed homes

There can be mortgage red tape and hidden fees when buying a foreclosed home. — Ocean/Corbis

In fact, the nation's foreclosure crisis was so severe that banks now own more than 872,000 homes, nearly twice as many as when the recession began in 2007, according to RealtyTrac, a website specializing in foreclosed properties.

However, buying a foreclosure is not for everyone. There is more risk and research involved, and buyers say the process can be stressful.

As with any home purchase, it's important to get preapproved by a lender before you settle on a property. This way, you'll know how much you can borrow based on your income and other financial information. Also, the seller will know that you're serious and intend to go through with the purchase.

Qualifying for a mortgage

With a foreclosure, though, there may be special requirements so that you — and the house — qualify for a mortgage. You may have to prove through an inspection that the home you choose is in good enough condition to be financed.

Some foreclosures sit empty and neglected for months or even years, inviting damage from roof leaks, frozen pipes and vandals. And angry owners sometimes strip them before being booted out.

It's also possible that before you can qualify for a mortgage, you'll be required to set up an escrow account with money that you plan to use for any repairs.

You must also find out if there are liens or back taxes owed on the property. What about outstanding water, sewer or utility bills? The buyer may be responsible for these.

Then there's the issue of the title. Remember the so-called robo-signing fiasco in which lenders, mortgage servicers and law firms cut corners to quickly process foreclosures, and the subsequent allegations by homeowners and consumer advocates that some were done improperly or erroneously? Attorneys general in California, Illinois and in other states continue to investigate these practices.

Next: How to avoid a legal hassle down the road. >>

Verifying the title

To avoid a legal hassle down the road, it's best to hire a title company or lawyer to research the title of the home you're interested in to make sure it's free of liens and back taxes, and that the foreclosure was done properly. It's also good for lenders and buyers to carry title insurance.

These are common precautions for any home purchase — but with a foreclosure they're even more important. In the event that a foreclosure is deemed invalid after you purchase the home, an extremely rare situation, the title insurer would defend your claim to ownership.

You may also like: Average home listing price interactive map. >>

Carole Fleck is a senior editor at the AARP Bulletin.

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