Many factors make the financing of a short sale property purchase unique. 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 on the sale, 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 property.
- Getting a short sale approved takes anywhere from several weeks to a few months—longer than a regular real estate sale.
- Many lenders will not lock in a loan rate for longer than 30 days without charging you additional fees.
- FHA repair guidelines can call for a lot of repairs such as fixing chipping paint from a pre-1978 home or installing handrails.
- If there are two loans on a short sale, you will need consent from both lenders to close.
Waiting for Short Sale Approval
Unless the short sale you plan to buy is a Wachovia short sale or a preapproved Home Affordable Foreclosure Alternative (HAFA) short sale, you can pretty much count on waiting a while for short sale approval. Getting a short sale approved takes longer than a regular real estate sale, but when working with a competent real estate agent, it can take several weeks to months.
During this period, interest rates may fluctuate—sometimes to your favor but often not to your benefit. Many lenders will not lock in a loan rate for longer than 30 days without charging you additional fees for the privilege. Some won't give you a loan lock until you get short sale approval. If your interest rates bounce upward, you could find that you are no longer qualified to buy that home.
Try to buy below your means. Don't stretch your preapproved loan amount to the max. Leave yourself some flexibility.
Not Closing Before Loan 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.
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.
Necessary Repairs Can be Roadblocks
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.
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% credit in some circumstances. Also, some short sale banks will automatically reject a buyer closing credit if the buyer is putting down more than 3.5%.
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 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.
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.