Short Sale Mortgage Loans: What Borrowers Need To Know

Did you know that around 33% of homebuyers are reduced to tears by the process of buying a home?

Doing your research and being prepared can go a long way toward reducing house-hunting anxiety. But what if you’re buying a short sale? Does that mean you might encounter even more reasons to cry while trying to get a short sale mortgage loan? Well, it depends.

Securing a short sale mortgage loan isn’t that different from purchasing a standard home. We’ve gathered the pertinent facts and interviewed experts to help you streamline the process and reduce the odds of you shedding tears.

Here’s what you need to know.

What’s a short sale?

In real estate, a short sale happens when the current homeowner is financially distressed and the lender agrees to let them sell the property for less than the amount still due on the mortgage.

In a short sale, the owner owes more on their mortgage loan than the house is worth. The lender recognizes that they’re going to be unable to recoup the full amount of the loan and so agrees to a short sale.

For buyers, the advantages are…

A short sale home can be a good investment opportunity.

With a short sale, you have a chance of getting a better price on the house than you might with a regular seller. The best way to get a deal on a short sale is to find one that’s priced under fair-market value. However, understand that the seller’s lender is going to try to recoup as much money as they can on the home, so you’re unlikely to score a majorly underpriced home.

You’ll also find that you may face less competition from other buyers with a short sale. Many homebuyers will steer clear of a short sale due to the belief that it involves a more complicated process, because they’re on a tight timeline, or because they think a short sale will require a mess of repairs.

Short sale homes tend to be in better shape than foreclosures. A foreclosed home can sit empty for months or years on end and deteriorate because of it.

Disadvantages include…

When it comes to a short sale, you need patience and perseverance.

One of the biggest obstacles you’ll encounter buying a short sale is time. “You have to wait for the current owner’s bank to approve the short sale,” says Jessica Sanchez, Director of Underwriting and Loan Management at HomeLight. “That process can take a long time.”

To ensure they get a good deal, the bank will review things such as the current owner’s payment history, current market state, and also comps. Comparable sales involve analyzing similar, recently sold properties in the area.

On average, you can expect a short sale to take between 60 to 90 days before you get the bank’s approval on your offer. Because the timeline often takes longer than with a traditional home, you’ll need to be sure to inform your lender that it is a short sale. They can usually work with you to extend your preapproval and locked-in mortgage rates.

While you can expect a short sale home to be in better condition than a foreclosure, there’s still the possibility it’ll need repairs. Even a brand-new home is often in need of at least one minor repair before closing!

Of course, there’s also no guarantee that the seller’s lender will accept your offer. Then your time has been wasted and you must begin the process of finding a house anew.

Can you get a mortgage loan for a short sale?

The short answer is: Yes!

In general, acquiring a loan for a short sale home is no different than getting a loan for a standard transaction. You can even get an FHA loan for a short sale, but be aware they have guidelines around this type of sale.

For example, you cannot purchase the short sale house as an investment property if you have an FHA loan. So if you’re hoping to turn the house into a rental, the property won’t qualify for the FHA loan.

What buyers need to consider with a short-sale mortgage

There are several different factors that you need to keep at the forefront of your thoughts while considering your short-sale mortgage options and determining which house is right for you. The more prepared you are, the better chance that your offer will be accepted.

Timing

All short sales require bank approval. This means you’re going to probably spend a fair amount of time waiting to hear back from the seller’s lender regarding whether they accept the deal.

Patience is key here: You could be waiting for several months.

“Sometimes a property might have a first mortgage, a first-position lien, then also a second-lien second mortgage,” notes Sanchez. “Then you have two separate banks that have to sign off in approval. This can extend the timeline substantially.”

Melanie Hunt, a top-selling real estate agent who has sold 74% more single-family homes than the average Fort Worth, Texas, agent, says: “It’s going to take longer than you think to get approved.”

There are steps you can take to increase your odds of securing approval, though. Hunt adds,

“Make sure you have a really good lender. You need a preapproval letter secured. The bank needs to know they can really close when the time comes.”

Once the current homeowner’s lender (or lenders) accept the deal, you’ll likely be given a tight deadline to close —sometimes as little as two weeks. That’s why it is essential that as the buyer, you’ve already secured a preapproval from your own lender.

If your lender offers the option, speak with them about getting pre-underwritten. Pre-underwriting can help to streamline the mortgage process and in the right circumstances, it can also help you close faster. With pre-underwriting, the mortgage company vets your financial information upfront and approves a specified loan amount.

Pre-underwriting also makes your offer more attractive to the selling lender. It shows that you’ve already acquired solid financing from a lender.

Rate locking

Because the timeline for pursuing a short sale typically takes weeks longer than a typical home sale, you’ll need to stay in close communication with your lender about a number of variables. One includes your interest rate lock: You’ll want to get your interest rate locked in for as long as possible.

Some lenders will let you lock in your interest rate for up to 90 days. The benefit to this is that if interest rates rise, you’ll be protected against your own rate going up. You might want to request a float-down option so that if mortgage rates fall below your locked-in rate, you can “float” your rate down.

The appraisal

When you’re looking into buying a short sale, the house will have to undergo two appraisals.

Your own lender will want an appraisal done before they fund your loan. They will want to ensure that the short sale house is worth the amount they are loaning you.

You will use this appraisal as part of the short sale package you submit to the seller’s lender to hopefully sign off on the deal.

The seller’s lender will also want an appraisal done to make sure they’re getting the best deal possible.

This is where things can occasionally get dicey. If your lender’s appraisal varies too much from the seller’s, you might be stuck either having to pay the difference or watching the deal fall apart.

Collaboration

If you’re looking for ways to expedite the short sale buying process, one avenue you can consider is collaboration. By getting a loan from the current homeowner’s lender, you can help to move things along at a faster pace.

All of the required paperwork will be in a single place, thus reducing both back-and-forth time and the chances of important documentation being misplaced.

However, it is in your best interest that you shop around for the right lender. Choose a lender with the best rates and terms, as a mortgage is a years-long commitment with far-reaching financial ramifications.

Conditions

While a short sale home will usually be in far better condition than a foreclosure, it may still have problems. If you must acquire an FHA or VA loan for the short sale, be aware that the property must meet certain livability standards.

Cris Didonato, who worked as a home inspector for more than 30 years and is now a consultant for Accurate Home Inspections, says that “while it hasn’t happened often, there have been a few houses that were uninhabitable.”

He continues, “I’ve inspected homes that had serious issues, like structural problems, but buyers are usually renovators, not people looking for a turnkey home.”

For an FHA loan, there are minimum property standards. Some of these standards include:

• Safety: The home must be in a livable condition that can protect your health and safety. That means if black mold is growing rampant in the basement, the house may not qualify.
• Security: The property must be secure and provide safe access for pedestrians and vehicles.
• Soundness: If physical deficiencies or conditions affect the structural integrity, then the house will not be approved for an FHA loan. For example, if there’s extensive termite damage or the foundation is sinking, those are grounds for denial of an FHA loan.

Closing costs

The last and most costly hurdle you will need to clear is paying the closing costs. Mortgage closing costs average between 2% to 5% of the loan.

Sometimes, as the buyer of a short sale, you’ll have to pay more in closing costs. The lender could refuse to pay for the customary seller closing costs, like the transfer taxes. Also, if you want any specialized inspections done, you’ll likely need to cover all the costs yourself, as well.

These various obstacles serve to highlight the importance of working with a top real estate agent. An agent who’s experienced with short sales will work to protect your interests, will be able to provide advice on whether the short sale property is a good investment, and will fight to keep the terms and costs in your favor.

Follow these tips and you’ll soon be on your way to successfully securing a short sale mortgage loan.

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