A Home Buyer's Guide To Short Sales
A home sale isn’t always a straightforward transaction between the seller and the buyer. A short sale is a case where the sale is more complicated due to issues on the seller’s end.
If you happen to fall in love with a home that’s part of a short sale, it’s important to understand what you’re getting yourself into. Short sales offer up their own rules, timeline and fees, but they often don’t change much about the loan application process. To help you determine whether a short sale purchase is right for you, let’s take an in-depth look at the short sale buying process.
What Is A Short Sale?
A short sale happens when a homeowner sells their home for less than they owe on the mortgage.
There are two reasons a short sale usually occurs:
- The homeowner can’t keep up with their mortgage payments and wants to find a way to leave their home without foreclosing.
- The home’s value has declined, so the homeowner now owes more on the home than it’s worth.
For example, say you need to sell your home, but the value has declined significantly since you bought it. Your mortgage balance is $300,000, but current market conditions mean you’re not going to get more than $250,000 for it. With your lender’s approval, you sell your house for $250,000. That $250,000 would go to your lender; you’d be “short” $50,000 in repaying the loan, and you wouldn’t make any money on the sale.
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When Does A Home Go Into Short Sale?
Unlike foreclosure, short sales are sometimes initiated by the homeowner, not the lender. Selling your home via short sale is a way to avoid foreclosure – but you have to take the first step of getting approval with your lender.
Short sales and foreclosures were much more common during the financial recession of 2008. As the economy continues to improve and the housing market recovers, short sales are less common, but they’re still an option for home buyers experiencing financial hardship.
When A Short Sale Won’t Work
If you’re a buyer on the hunt for a short sale, know that short sales are not always a slam dunk. The short sale process can take a long time, and there’s no guarantee the transaction will go through. For example, if the seller files for bankruptcy before the sale closes, the deal will be off. Bankruptcy doesn’t allow for any collection activity to take place, so the lender won’t be able to recoup money via proceeds from the short sale.
When A Short Sale Will Work
Here are some of the things the lender looks at when deciding whether to approve the short sale:
- The home has to be worth less than what the seller owes on the home. The lender will want to review recent sales of comparable properties to make sure this is true.
- The seller must be able to prove financial hardship. They have to show that they don’t have the income or assets to pay back the rest of the mortgage.
How Long Does A Short Sale Take?
The short sale process can be slow and unpredictable. It can take days or weeks for an offer to be accepted. The whole transaction can take three or four months, or even longer.Here’s how the short sale process works:
Step 1: Get Approved For Financing
As with any home purchase, the first step is getting approved. You can use Rocket Mortgage® to get an instant online approval so you know how much you can afford and are prepared to make an offer when you find the right home.
Step 2: Get A Real Estate Agent And Find A Home
It will probably be difficult to find short sale properties online if you’re only looking at short sales, although looking at pre-foreclosure property listings might be a place to start.
Navigating a short sale can be tricky for buyers and sellers alike. A great real estate agent can help you navigate the buying process, make the right offer, and understand what you’re getting yourself into. Our sister company Rocket HomesSM can connect you with a local real estate agent who can help.
Step 3: Make An Offer
If you do happen to fall in love with a house that the seller is trying to sell via short sale, it’s important to consider what the lender will think of your offer. You might be looking at the short sale as a way to get a deal on the home, but keep in mind that the lender is still trying to recoup as much of the mortgage balance as possible – and likely also has to meet investor guidelines to accept the offer. Your offer should be close to the market value of the home if you want it to be accepted by the lender.
When you’re looking at properties, beware of fraudulent activity. If the seller asks you to pay money under the table for the opportunity to apply for a short sale, refuse and report it.
Step 4: Get An Inspection
Short sale properties are sold “as is.” This means you won’t be able to negotiate a lower purchase price if there are problems with the property. However, the seller will be required to disclose any known defects.
Be sure to get a home inspection so you know what you’re getting yourself into. If repairs are needed, research the cost or get estimates so you can understand if the home will make financial sense for you in the long run.
Step 5: Close On The Property
Once the lender has accepted the short sale, you can close on the property, get the keys and move in.
Getting A Loan For A Short Sale Home
Buying a short sale property usually doesn’t change much about the loan application process. The same credit, income and asset requirements will apply. You’ll need to have good credit and be able to show that you have enough money to cover your down payment, closing costs and monthly payments.
You should keep in mind that in a short sale transaction, you’re not going to be able to ask the seller to cover costs that they might cover in a regular home sale. For instance, you can’t ask them to pay your closing costs, provide a home warranty or make repairs.
To get started with your loan, you can apply online with Rocket Mortgage® by Quicken Loans®. You’ll be able to see exactly how much you can afford and get an instant online approval so you’re ready to make an offer if the right short sale property comes on the market.
Buying a short sale property usually doesn’t change much about the loan application process. The same credit, income and asset requirements will apply. You’ll need to have good credit and be able to show that you have enough money to cover your down payment, closing costs and monthly payments. Rocket Mortgage® by Quicken Loans® is here to help you every step of the way.
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