Talk to anyone who has dabbled in real estate in recent years and they will almost certainly have an opinion on short sales. Though it's not as common anymore, homeowners short-selling their homes present an opportunity for you to get your foot in the door. Here's what you need to know if you want to buy a short-sale home.
What Is a Short Sale?
A short sale is a transaction in which a homeowner is selling their home for less than what they owe on the property. The bank with the loan against the property must agree to be shorted the original dollar amount lent to the homeowner. Not always, but in most instances, short sales can also be identified as pre-foreclosures. A pre-foreclosure is a situation in which a homeowner has stopped making the mortgage payment, with the foreclosure process then following suit.
Banks can be reluctant to grant short sales unless there is some form of financial hardship causing an inability to afford the mortgage payment. Short sales used to take upwards of six to eight months for a bank approval. If there was more than one lender on the home such as a first mortgage and a second mortgage, the process would take longer. That time frame has changed. It is now reasonable to expect a short sale to take about three months from the time a purchase contract is presented to the bank for approval. Unlike a foreclosure where you're dealing strictly with a bank, with a short sale you're dealing with the bank and the owner of the property. So while the bank holds all the cards, you're also dealing with a human being.
Getting Bank Approval
The bank usually will approve a short sale transaction if the cost of letting the home go to foreclosure is greater than the short sale loss. This is critically important because a bank would not approve a short sale if there is equity in the transaction, as they can take the house back and profit by doing so.
The bank has to agree to lose money by allowing the short sale. Because of this, time can be the short sale culprit. On the hunt for a house? Fortune favors patient buyers and here is why: Many homebuyers do not have the stomach to handle a potentially long, drawn-out process to purchase a home under short sale terms, let alone the hoops they may have to jump through when the bank signs off on the approval.
Why They're a Deal for Homebuyers
Short sale properties can be worth your while because you have less competition coupled with a haircut price. Done correctly, it is possible to buy a short sale house for below market price, or at minimum a reasonable price given the location and home specs.
When the bank receives a short sale request from a homeowner, the bank does what's called a BPO (Broker Price Opinion), which is simply an opinion of what the house is worth from a local real estate broker. The bank uses this BPO when setting the short sale amount. The BPO always has variances in terms of the valuation, similar to a home appraisal, it is merely an opinion of value. A short sale house with less competition may entertain a slightly lower offer — usually within 10% of the list price. This will be determined by the location, neighborhood and home details: bedrooms, bathrooms, square footage and lot size. The makings of a good short sale opportunity could be a house in need of minor TLC (which affects the BPO) in a desirable location.
How to Find Short Sales
The best way to find short sales, other than word-of-mouth, is to use a good real estate agent. A true expert will have deep, embedded connections in the community within the area you are looking to purchase. Real estate agents also connect with other real estate agents both in their office and at broker tours, prompting news of upcoming possible "pocket listings." Pocket listings are houses that never actually hit the market, which means zero competition for you.
Financing a Home With a Short Sale in Your Past
If you have previously short-sold a home in the past seven years, and you're looking for a conventional mortgage loan, you'll need 20% down (or equity) and four years since the short sale transfer date. Don't have 20% down and still have a short sale in your past? You can apply for an FHA loan, and then it's a three-year wait time from the short sale transfer date with only a 3.5% down payment (or equity) requirement.
Fannie Mae & Freddie Mac are still gun-shy about lending to short sale borrowers. If a previous short sale is affecting your ability buy a home, focus on improving your credit, increasing your down payment and paying off debt — all of which will significantly bolster your qualifying ability when the clock is up. You can see your free credit report data on Credit.com, and get a plan for improving your credit. You can also check this tool to see how much house you can afford.
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