If you’re a first-time home buyer and hear terms like “short sale” coming up during the home buying process, you might think it’s a great option to get a home at a bargain price.
While you may be able to buy a short sale for a lower price than a similar home would sell for in a traditional sale, you should be aware of the potential pitfalls associated with the short sale process.
Let’s go over what a short sale is and how it works to determine if it’s the right option for you.
What Is a Short Sale?
A short sale is when the proceeds of a property sale fall short of the balance remaining on the property’s mortgage loan. In other words, the seller owes more on the property than what he or she is selling it for.
This happened quite frequently after the 2008 housing market crash, where homeowners found themselves in a situation where their property value fell, making it nearly impossible to refinance or sell their home. That’s where a short sale came in, giving the homeowner an option to work with their lender and sell their home for less than the existing mortgage balance.
For prospective home buyers, a short sale can be a good thing because you can potentially get a lower price on the home compared to a traditional sale. However, there are a couple things you should know about how they work before you think about buying one, one being the difference between a short sale and a foreclosure.
What Is the Difference Between a Short Sale and Foreclosure?
As a reminder, a short sale is when the property is sold for less than (short of) what’s owed on the home and the seller isn’t able to make up the difference at closing. The lender holding the existing mortgage then agrees to discount the loan balance or take less money than what’s owed.
A short sale is different than a foreclosure, which occurs when the current owner of the home stops making payments and eventually vacates the property. Typically, it can take several months of missed payments for a foreclosure to be initiated by the mortgage lender, but the lender eventually has to take the property over and try to sell it on their own.
Even though this isn’t an ideal situation for the owner, a short sale is a much better option than going into foreclosure because a short sale typically doesn’t hurt the owner’s credit score as much as a foreclosure would.
In a foreclosure, after the lender takes control of the property, the lender still has to put the house on the market, and it could take months before a house gets sold. Foreclosure is a very expensive process and it’s one of the reasons why lenders would rather approve a short sale than going through with a foreclosure.
From a home buyer’s perspective, the process of purchasing a foreclosure over a short sale can be faster, but because the home has been vacated and possibly winterized (a process where the plumbing is drained and the water is turned off to reduce damage to the home) the condition of the home could be worse than a short sale.
How Does a Short Sale Work?
In a short sale, the mortgage lender has made arrangements with the current homeowner to discount a loan balance or to take less money than what’s owed. Typically, the owner needs to prove financial hardship before a lender accepts a real estate short sale deal.
Because the lender is agreeing to sell the property for less money than it would take to pay off the loan, purchasing a short sale property requires you to put in an offer to be accepted by the lender.
Typically, a short sale purchase will start with you signing a purchase agreement with the seller, which is then sent to the lender currently holding the existing mortgage on the home. Once they approve the purchase agreement, you then contact your lender and start your mortgage process.
This process can be tedious. Not only can it take a long time, but when the lender holding the existing mortgage approves the short sale, it usually only gives you a short window to close the loan – typically a couple weeks. Miss this deadline and you’re back to square one, signing the purchase agreement with the seller again. Because of this, there’s no real time frame that can accurately describe how long a short sale approval takes because it differs greatly from lender to lender and case to case.
Some lenders, including Quicken Loans, have made the short sale process easier through a program where the buyer’s lender can begin underwriting the new loan as soon as the buyer has a signed purchase agreement from the seller. This can potentially give you more time to close the loan. You’ll still have to wait for the lender holding the existing mortgage to approve the sale, but it ultimately gives you a head start and a better chance of meeting the deadline for closing.
Also new to Quicken Loans is the Power Buying Process™ and the RateShield™ Approval1, that gives you an edge in the home buying process. RateShield allows you to lock in the current interest rate for up to 90 days while you shop for your dream home. If rates go up, your rate stays the same. If rates go down, your rate drops. Either way you win!
This process could potentially help during the short sale process, as it could give you additional time after submitting a purchase agreement to us.
Should You Buy a Short Sale?
Buying a short sale property can potentially save you money as they usually sell for less than traditionally sold homes. However, beyond the drawn-out process of purchasing a short sale, there are a few things to consider before buying one. Let’s discuss that next.
Things to Consider Before Buying a Short Sale
First, short sales, like foreclosures, are sold as is. This means if there are problems with the home, you can’t negotiate with the seller to fix them because the lender is ultimately in control. So, if you’re looking at short sale properties, take careful note of the condition of each one.
Because short sale homes might be in poor condition, this can raise problems during the inspection process. They might look fine on the surface, but if the inspector finds that the roof needs to be replaced or the plumbing is a wreck, this could potentially cost you thousands down the road.
This can also pose problems if you’re considering getting an FHA loan, which requires certain livability standards in order to receive financing on a home. Since short sales might be in poor condition, you might not be able to get the financing you need.
Lastly, if at some point the seller stops making mortgage payments, all that work you put into the offer and negotiation could go down the drain if the property goes into foreclosure.
This isn’t to say you should consider purchasing a short sale home. At the end of the day, you’re potentially saving thousands on purchasing a home.
However, it can be helpful to work with an experienced real estate agent because they’ll be able to help you navigate the process of putting an offer in and act as the go-between for you when communicating with your lender, the seller’s lender, the seller and any other relevant parties.
If purchasing a short sale sounds like something you would be interested in, the best thing for you to do is to get started online or speak with a Home Loan Expert today at (800) 785-4788. They’ll be able to help navigate you through the twists and turn a short sale home might bring.
Have you purchased a home in a short sale in the past? Share your experience with our readers in the comments below!
1RateShield Approval locks your initial interest rate for up to 90 days on 30-year conventional, FHA and VA fixed-rate purchase loan products. Your exact interest rate will depend on the date you lock your rate. Once you submit your signed purchase agreement, we’ll compare your rate to our published rates for that date and re-lock your interest rate at the lower of the two rates for an additional 40 to 60 days. Additional conditions or exclusions may apply.
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