What is the biggest disadvantage to a lender when it forecloses on a mortgage?

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Is a foreclosure property right for you? Or should you stay away?

Key points

• Buying a foreclosure is an option you might consider in a tight housing market.
• There are benefits and drawbacks to consider before you go this route.
• You may save money on the purchase price, but then spend a lot more getting it back to a livable condition.

Although housing inventory has been opening up in the real estate market, there still aren't enough available properties for sale to meet buyer demand. If you've been house-hunting for months and have yet to have success, you may be at the point where you're willing to consider purchasing a foreclosed home.

When you buy a foreclosure, you're effectively buying a home a bank or lender has reclaimed because the owner stopped making payments on their mortgage. While there are benefits to buying a foreclosure, there are also some key drawbacks you should know about. Let's review.

Pro #1: A lower purchase price

Some foreclosures are in better shape than others. But often, when you buy a foreclosure, you're getting a home that isn't in the best condition. In some cases, that can mean the home needs a lot of cosmetic work. In other cases, it can mean the home needs serious repairs.

Because of this, you'll generally pay a lot less for a foreclosure than you will for a standard home.

Pro #2: A chance to put your own stamp on a home

Foreclosed homes often need work, but that's not necessarily a bad thing. It may be that you have certain design ideas you want to bring to life. It's harder to justify tearing down a perfectly good home to put your own stamp on it. But if you're buying a home that's in poor shape to begin with, it's much easier to make the case for a complete remodel.

Con #1: You don't know how much repair work you're taking on

Homeowners who lose their properties to foreclosure often get to that point because they've fallen on tough financial times. As such, it's often the case that foreclosed homes are seriously neglected before they're taken away from their owners. As a buyer of such a home, you take on a big risk of having to spend more than you've bargained for on repairs.

Keep in mind that with a regular home, you can often negotiate money off of your purchase price if issues are found during a home inspection. Foreclosed homes are often sold as-is, so you can't negotiate your way to a lower price despite the risks you're taking on.

Con #2: You may have a harder time getting a mortgage

Some people who buy foreclosed homes do so with cash. This is especially the case if the buyer is an investor looking to flip the home. But if you need to finance a home purchase with a mortgage, you might find it more difficult than usual to get approved. If the home is in really dire shape, a mortgage lender may be hesitant to give out a loan -- even if you're an otherwise strong borrower with solid credit.

Should you buy a foreclosure?

Buying a foreclosure can be a bit of a gamble. And if you go that route, you'll really want to make sure you're getting a low purchase price so you have plenty of money left over to sink into that home as needed. But you may find that buying a foreclosure gives you a chance to break into homeownership and renovate a property to meet your needs and personal taste.