This is an outstanding time to buy a home - distressed property or not. With historically low interest rates, and a glut of homes on the market in most areas, there are bargains to be found. And the U.S. tax credit of up to $8,000 for first-time buyers - good for a home purchased before Dec. 1, 2009 - makes purchasing a home even more attractive.

Is a distressed property for you? Here are pros and cons of buying one.

Advantages of Buying a Distressed Property

First, you'll be dealing with a highly motivated seller – either a bank in the case of a foreclosure, or in a short sale, sellers who are in financial trouble and very interested in getting out of a mortgage they can no longer afford.

These types of sales take much of the emotion out of the process. You won't be insulting anybody, for instance, if you make an offer that's lower than the asking price. (That's not to say that the low offer will necessarily be accepted, of course.)

Lenders are extremely interested in getting these homes sold and off the liability side of their balance sheets. Many foreclosed properties can be purchased for only a percentage of what they would have commanded five years ago. (This situation is beginning to change, though; bidding wars are breaking out on some foreclosed properties these days, especially those that are moderately priced. Your  agent will know what's going on in this area and will be able to help you arrive at a reasonable strategy for making an offer.)

If you're looking at a short sale, you're not likely to get quite as good a deal as on a foreclosure. But there are definite advantages to purchasing one of these homes. For one thing, since the homeowners want to get the home sold quickly, they are likely to keep it well-maintained and in good move-in condition.

Disadvantages of Purchasing a Distressed Property

If you're looking for a "steal," you're probably not going to find it. The market is heating up, with more and more buyers jumping into the market. If you're purchasing a home to live in, you'll often be competing not only against buyers similar to yourself, but against investors. More competition inevitably leads to higher prices.

The transaction process for short sales or foreclosures often takes longer than for traditional transactions. It's sometimes not clear which lending institution actually owns a mortgage loan, and it can take time to get it all sorted out – especially if there's a second mortgage involved, which is often the case.

Some foreclosed properties are also in rough condition. Many have sat idle for a long time with minimal or no maintenance. The departing owners may have sold off fixtures, or damaged the property.

Purchasing Tips

It's critical to have the home professionally inspected before you make an offer or put down earnest money. The inspector will assess the structure's soundness and may uncover problems that would be very costly to repair. Banks usually sell foreclosed homes as-is, meaning they won't make any allowances for repair. And even in a short sale, they likely won't make any such allowances, because they're already losing money on the transaction.

You should have your financing in order before pursuing a foreclosure purchase. Pre-approved buyers have the best chance of getting the property in case of multiple offers. Also, banks generally aren't interested in contingencies (for instance, needing to sell your current home before purchasing another).

You might also consider hiring an appraiser who'll tell you what the house is worth. Your agent can also perform a Comparative Market Analysis.

Your agent will  guide you through the process - from obtaining a loan to identifying a home, to negotiating with the sellers (whether homeowners or banks), to closing.

Mortgage and foreclosure terms defined.

Distressed Properties and FHA Loans

If you're a first-time homebuyer, a federally insured FHA (Federal Housing Administration) loan might be a good option. The FHA has a program to help you repair a fixer-upper. You can get one loan that combines the mortgage with the repair costs. The amount of the loan is based on the projected value of the property once repairs are made.

FHA loans only require a 3.5 percent down payment – compared to 20 percent with conventional loans – and the down payment can come from an employer, family member or charitable organization. FHA loans also have lower closing costs than conventional mortgages.

Since the federal government insures these loans, you'll get a competitive interest rate and lenders may be willing to give you terms that make it easier to qualify for a loan. If you have less-than-perfect credit, it's easier to obtain an FHA loan than a conventional mortgage.

Find out more about FHA loans.

About HUD Homes

FHA-insured homes that go into foreclosure are acquired by the U.S. Department of Housing and Urban Development (HUD). HUD homes are offered for sale through Internet sites managed by management companies under contract to HUD.

Real estate agents who register with HUD can submit offers on behalf of their clients. HUD pays the agent's commission.

HUD homes are sold as-is, without any warranty. HUD doesn't make repairs nor pay to correct any problems. Again, that makes it critical to have homes inspected before making an offer.

In designated revitalization areas, law enforcement officers, K-12 teachers, firefighters and emergency medical technicians can purchase a home at 50 percent off the listing price. (They must commit to live in the property for three years.) Additionally, evacuees from hurricanes Katrina, Rita or Wilma can purchase a HUD home at a discount.

Find out more about HUD homes.

Find additional resources to help you avoid foreclosure.

Where To Get Help
Here are links to private and government Web sites that can provide information about alternatives to foreclosure.
Housing Not-for-Profits
Homeownership Preservation Foundation: (888) 995-4673
[www.995hope.org]
The National Fair Housing Alliance: (202) 898-1661
[www.nationalfairhousing.org]
Coalition for Nonprofit Housing and Economic Development: (202) 745-0902
[www.cnhed.org]
Neighbor Works America: (202) 220-2300
[www.nw.org]
Center for Responsible Lending: (202) 349-1868 [www.responsiblelending.org]
Homefree Funding: (866) 696-2329
[www.homefreeusa.org]
U.S. Government Sites
Homeowner Affordability and Stability Plan
[http://www.financialstability.gov]
Department of Housing and Urban Development
[www.hud.gov]
HUD Housing Counseling
[www.hud.gov/counseling]
HUD Guide to Avoiding Foreclosure
[http://www.hud.gov/foreclosure/index.cfm]
Government-Sponsored Enterprises
Fannie Mae
[www.fanniemae.com]
Freddie Mac
[www.freddiemac.com]
Fannie Mae: Help for Homeowners
[http://www.fanniemae.com/homepath/homeowners/in_foreclosure.jhtml;jsessionid=T1MKUZVXU5WD3J2FECISFGI]
Fannie Mae: News
[http://www.fanniemae.com/media/index.jhtml?p=Media]
Fannie Mae: Avoiding Foreclosure Scams
[http://www.fanniemae.com/homepath/resources/foreclosure_scams.jhtml?p=Resources]
Fannie Mae: Preventing Foreclosure
[http://www.fanniemae.com/homepath/resources/index.jhtml]
Freddie Mac: News
[http://www.freddiemac.com/news/mediaroom]
Freddie Mac: Avoiding Predatory Lending
[http://www.dontborrowtrouble.com]
Freddie Mac: Preventing Foreclosure
[http://www.freddiemac.com/corporate/buyown/english/avoiding_foreclosure/index.html

Mortgage and Foreclosure Terms
Adjustable Rate Mortgage (ARM): A mortgage loan or deed of trust that allows the lender to adjust the interest rate. The rate change is agreed to at the inception of the loan.
Amortize: Repayment of debt with payments of both principal and interest calculated to pay off the debt at the end of a specified time period.
Balloon Mortgage: A mortgage with installments of principal and interest that do not fully amortize the loan. The balance of the mortgage is due in a lump sum, usually at the end of the term.
Buydown Mortgage: A mortgage with a below.market interest rate that results in lower monthly payments. A buydown is made by the lender in the form of "points" in return for money received from the builder, seller or homebuyer.
Cash for Keys: A deal a lender may make with a homeowner. The homeowner gets a cash settlement in exchange for vacating his/her foreclosed home and leaving the home in good condition.
Convertible ARM: An ARM that may be converted into a fixed.rate mortgage within an agreed-upon time period. There is usually a fee when the loan converts.
Deferred Payments: Payments the lender agrees to postpone as part of the workout process when facing foreclosure.
Equity: The net value of an asset. In terms of your home, the difference between the value of the property and the amount you owe on the mortgage.
Escrow: Sometimes called impounds or reserves. Money or documents deposited with a third party to be delivered upon fulfillment. For example: a borrower deposits money with the lender to pay taxes and insurance on a property when they become due.
Fixed-Rate Mortgage: A mortgage where the interest rate and payments remain the same for the life of the loan: typically 15 or 30 years.
Forbearance: An arrangement in which the lender agrees not to take
legal action if a homeowner arranges to pay the amount owed on a mortgage by a specified date.
Foreclosure: A legal process where a mortgaged property is sold to recover the amount owed.
Refinance: The payoff of an existing loan with a new loan using the same property as security.
Repayment Plan: An arrangement in which the borrower makes additional payments to pay down the past-due amount while still making regularly scheduled payments.
Workout: Also called restructure. An alternative to foreclosure. Can include loan modification, short sales or forbearance.