Financing a Short Sale this Summer
As the number of short sales has risen, foreclosures have fallen. In fact, short sales are becoming a major factor in the nation’s real estate industry—not just a thorn in its side but also an important factor in its recovery. In the first quarter of this year, the number of short sales has outpaced the number of REO sales in 12 states, largely thanks to investors buying them in hopes of flipping, or renting, for profit. But you don’t have to be an investor to buy a short sale. You just have to understand the process is different than buying a traditional, market rate home. Here we offer some insight.
Financing a Short Sale
Understand that though you may be able to save money on a short sale, your financing options will be different, and more complicated, than they would be in a traditional transaction.
Fortunately, starting June 15, the Federal Housing Finance Agency required that both Freddie Mac and Fannie Mae make buying a short-sale a more streamlined process. Now, both agencies have to:
- Respond to initial requests for a short sale within 30 days of receiving the buyer’s submission.
- Give potential buyers a final decision within 60 days
Though we expect with the new law that the short sale process can now be a quicker one, you may still have to wait—and wait—to find out if you’ve been approved to buy the home. The easiest loans are likely to be HAFA short sales because they are government approved, but not every home, nor every homebuyer, can qualify for these.
Unfortunately, while you wait, you can’t usually lock an interest rate, so you can’t know for certain what interest your loan will entail. And if (though this seems unlikely in the short-term) rates go up in the interim, you may find you no longer qualify for the original loan amount. Your best bet here is to aim for the lowest price possible, one well below the amount you’ve been pre-approved for. That way, you have plenty of wiggle room throughout the process.
Also, remember that short sales are basically bank owned, and banks don’t have much incentive to repair these homes. Most short sales are sold “as is.” But some loans have very strict conditions for the home’s quality. A VA loan, for instance, requires a clear pest report. An FHA loan may require any chipping lead-based paint to be repaired or removed. Here’s where those home inspections we’ve been urging you to pay for come in. Your real estate agent can help you decide, based on the inspector’s report, if you’re really able to afford this property.
Look for One Loan on the Title
Sometimes a property has more than one loan on it, because the original owner took out a first, and then a second, mortgage. Ask your Realtor® to pull the title report before you spent money on inspection and appraisal, because if there are two lenders instead of one, the process becomes not only more complicated, but also more expensive. It might not be worth it in the long run.
Seasoned real estate agents have been through the short sale process. They can guide you, and explain even the most red-taped requirements, in language you can understand, specific to the area you’re interested in. This knowledge really helps, because though the laws we've discussed here are largely federal, local state and city governments have unique processes in place for distressed property transactions.
In the meantime, check out these additional resources (some even in video!).
- ZipTV: ZipRealty’s Short-Sale “How To” for Homebuyers
- ZipRealty’s Learning Center (several links on buying distressed properties)
Anna Marie Erwert writes from both the renter and new buyer perspective, having (finally) achieved both statuses. She focuses on national real estate trends, specializing in theSan Francisco Bay AreaandPacific Northwest. Follow Anna on Twitter: @AnnaMarieErwert.