The Top 5 Problems With Financing a Short Sale

For sale sign

 Photography taken by Mario Gutiérrez. / Getty Images

What makes financing a short sale purchase unique? Plenty. As if short sales weren't enough of a hassle to buy for most people, the type of financing a buyer uses has a huge impact, for a variety of reasons.

If you try to get the wrong type of loan, even if your short sale is approved by the seller's bank, you might not be able to close that transaction because of financing problems. Unfortunately, not every type of available financing in the United States can be used to buy a short sale.

Waiting for Approval

Unless the short sale you plan to buy is a Wachovia short sale or a preapproved HAFA short sale, you can pretty much count on waiting a while for short sale approval. Getting a short sale approved can take from four to eight weeks on average, to a year or longer.

During this period of time, interest rates fluctuate. Many lenders will not lock a loan for longer than 30 days without charging you for the privilege. Some won't give you a loan lock until you get short sale approval. If your interest rates bounces upward, you could find that you are no longer qualified to buy that home.

Tip: Try to buy below your means. Don't stretch your preapproved loan amount to the max. Leave yourself some flexibility.

Not Closing Before Approval Expires

Many short sale banks want to close within 30 days of short sale approval. If you are getting a loan that requires a longer approval period such as a Section 184 loan, you might not be able to close within the time specified and your approval will expire.

Sometimes, even with a conventional loan, delays with your short sale financing are inevitable. Maybe the appraisers are backed up and the appraisal can't be completed in time or underwriting takes longer than usual. If the loan rep did not obtain a breakdown of approved fees, and some of the fees the seller is not allowed to pay were transferred to the buyer, revising the Good Faith Estimate could delay the process, too. Some banks will not issue an extension for their short sale approval letters.

Tip: Ask your lender upfront if the company can guarantee a 30-day closing. Moreover, if you hear that the approval letter is coming, start your loan early.

Potential Repairs Rarely Paid for by Ban

Many lenders have loan conditions. FHA repair guidelines can call for a lot of repairs such as fixing chipping paint from a pre-1978 home or installing handrails. A VA loan will undoubtedly call for a pest report and a clear pest completion certificate. Even if your loan is conventional, the appraiser might note a failing roof and ask for a replacement before agreeing to finance that short sale. Banks will rarely pay for repairs. Short sales are sold in "as is" condition. Moreover, the bank won't let the seller pay for repairs, because if the seller has any extra money, generally the bank will want those funds.

Tip: Ask your agent to pre-inspect the home and discuss potential problems in advance.

Closing Costs May Not Be Covered

Often, buyers will ask a seller to pay their closing costs. If the buyer doesn't have enough money to pay for closing costs and the bank refuses to allow the concession, the buyer might not be able to buy that short sale.

Sometimes, Wells Fargo FHA short sale banks will reduce the amount typically paid by other banks because Wells Fargo says its guidelines for FHA prohibit a full 3 percent credit in some circumstances. I have also found that some short sale banks will automatically reject a buyer closing credit if the buyer is putting down more than 3.5 percent.

Tip: Ask the listing agent if the bank will pay a concession toward closing costs when you write the offer or offer more than list price to compensate.

Dealing with Two Lenders and Getting Approval

If there are two loans on a short sale, you will need the consent from both lenders to close. You are taking a risk if you move forward with an appraisal and/or home inspection before you receive approval from both lenders. One lender might agree while the other might reject the short sale or object to the seller contribution on the HUD.

Tip: Ask to see a preliminary title report or title commitment to determine how many loans are secured by the property. There could be a paid-off loan that was never reconvened.

At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.