You go out of your way sometimes to drive past a certain house you’re in love with. It has everything you’ve ever wanted. As fate would have it, right when you’re ready to start seriously searching for a home to buy, your dream house is listed for sale as a short sale. Now what? If you don’t know about short sale requirements for buyers, you might feel like you’re out of luck.
Short sales are rarer in the housing market nowadays. However, they’re still around and can yield an excellent deal for buyers. Purchasing a short sale is not that different from buying a regular home, but there are slight variations on the process.
Before you rush into buying your short sale dream home, let’s take an in-depth look at all the finer details involving buying one. We’ve done the research and interviewed experts to gather all the important facts in one place on short sale requirements for buyers.
What’s a short sale?
A short sale is when a property is sold at less than what’s owed on the remaining mortgage balance. This type of situation usually occurs when the owner is financially distressed and no longer able to make their monthly mortgage payments.
When a home is listed as a short sale, the lender forgives the remaining balance of the loan. Typically, a lender agrees to a short sale when the property is worth less than the balance of the mortgage.
When you are a buyer looking at purchasing a short sale, you’ll get a mortgage just like you would to buy any other house.
What are the short sale requirements for buyers?
Buying a home is a complicated process. The best way to save time, money and stress is to be prepared. Preparation at every step of the process is the best way to protect yourself! Here are a few of the things you’ll need to do to buy a short sale property.
You’ll need to get preapproved for a mortgage loan
Before you can make an offer, you should be preapproved by a lender. If you want to try and expedite things, you can use the same lender that owns the seller’s mortgage. However, it’s strongly recommended you shop around with your choices to find a lender with the best rates.
According to Melanie Hunt, a top-selling real estate agent in Fort Worth, Texas, who has sold 74% more single-family homes than the average area agent, “Getting a preapproval is one of the most important things a buyer can do to improve their odds of securing a short sale.”
She adds, “You need a strong pre-qualification letter from a legitimate lender, and there’s no getting around that. You can also help yourself by doing the inspection upfront, knowing the seller likely won’t get any repairs done. Also, you should know that you can’t be related to the seller when it comes to short sales.”
There is a process you must follow to get pre-approved for a mortgage. You also need a good credit score and savings for a down payment set aside. Let’s take a more in-depth look at these requirements.
To get preapproved, you will need:
The lender you apply to for a mortgage is going to ask for a lot of paperwork. It’s best to prepare in advance and start collecting documents ahead of time. You’ll want to have:
- Proof of income: You’ll need proof of income, such as tax returns with W2s or 1099s for the past two years. You’ll also need pay stubs for the past 30 days. Bank statements can also be used for certain mortgage loans if you have a non-traditional job or a side gig.
- Fair to good credit: You need a minimum credit score of 580 to qualify for an FHA loan. If you apply for a conventional loan, then you need at least a score of 620 or higher. The higher your credit score, the better your terms will be. And when the economy is tight, lenders tend to raise credit score standards.
- A down payment saved up: A recent report by the National Association of Realtors found that the average down payment on a house for first-time homebuyers is around 6%. If you’re not securing an FHA loan, many conventional lenders will allow a 3% to 5% down payment, but you’ll need a good credit score and will have to pay mortgage insurance on the loan until you reach 20% equity.
It’s even better if you also have:
Remember that the short sale home you’re interested in buying has possibly been neglected. People who are in financial distress and forced to do a short sale often don’t have the funds to maintain the home or make repairs when something breaks.
Keeping in mind that you don’t know what state the home might be in, you’ll want additional savings for fees and expenses beyond just the down payment. There are also potential repairs to budget for (which the seller likely won’t be able to do since this is a short sale), as well as closing costs.
The closing costs are the second-largest chunk of money you’ll need to account for, right behind the down payment itself. Closing costs can add up to thousands of dollars in fees. On average, closing costs comprise between 2% and 5% of the loan amount.
And it’s even better if you can get pre-underwritten
If you’re thinking that because you’ve been preapproved for a mortgage loan, nothing can stand in your way now … not so fast. Preapproval is exactly as it sounds. The lender has given you temporary approval, but that approval is still contingent on many factors. Your mortgage could be in jeopardy if your credit score drops, if your bank statements show any signs of financial distress, or for several other reasons.
Preapproval typically requires you to submit your financial information to a lender. Underwriting is the step in the loan approval process when an underwriter goes through all of that financial information, every last document, with a fine-toothed comb, to verify all the information and make sure you qualify for the loan. If the underwriter finds a discrepancy in your application, you’ll have to fix it before the loan can proceed.
Consider getting pre-underwritten to bolster the chances of your offer being accepted. Some lenders offer pre-underwriting, including HomeLight Home Loans, so that you can have a fully verified preapproval. You don’t need any extra stress when buying a home!
You’ll need the ability to find a house and negotiate a short sale deal
When you are shopping for a home to purchase, it’s essential you work with a top agent who can guide you through the process. Many short sale homes are listed on the MLS, and if you want timely access to these sales, you’ll need a real estate agent to help.
There are a lot of reasons why you need a real estate agent to buy a home. A 2019 report from the National Association of Realtors found that 38% of buyers using an agent got a lower price on the home, and 47% got better sales contract terms thanks to their agent. Using an agent can save you thousands of dollars in the long run!
You’ll need the patience to work with multiple lenders
Short sales require you to have a bit of patience and fortitude during the process, not mention a little luck. A short sale has to be approved by the lender that owns the seller’s mortgage loan, and they can sometimes take more than a month to respond to your offer. On average, you could wait between 60 and 90 days to hear back.
However, once you do finally hear back, you can expect things to move fast. Oftentimes, the bank will require you to be ready to close within two weeks.
That’s why it’s vital to be preapproved beforehand because without a preapproval or pre-underwriting, it’ll be difficult to meet the bank’s closing deadline. Be sure to mention to your loan officer or mortgage broker that you’re interested in a short sale so that they’ll be aware of your rapidly evolving situation.
You’ll need the ability to walk away if things go south
There are instances where it’ll be in your best interest to walk away from the sale. It is important that you don’t become transfixed on one home. This helps you let go of a buy when you need to. Emotion can get in the way of business.
Maybe the lender wants you to take on more of the closing costs than you’re comfortable with. Perhaps the home inspector uncovered several expensive issues that you don’t want to have to deal with repairing. Every dollar spent on repairs is a dollar that comes out of your bottom line.
Cris Didonato, who has worked as a home inspector for over 30 years and is now a consultant for Accurate Home Inspections, has inspected homes that had enough problems that the buyer walked away. “Two out of 10 times, a home I inspect will have numerous, costly problems. Normally it’s a roof or structural problem. Sometimes these issues were caused by drainage problems and lack of proper grading.”
If you work with a top real estate agent, they’ll protect your interests and make sure that you can still walk away from the home based on these contingencies. If the short sale house you’re interested in is morphing from a dream home into a waking nightmare, then it’s time to say goodbye and look elsewhere.
Follow these tips from experts on short sale requirements for buyers and you’ll be fast on your way to securing your dream home. Happy house hunting, and good luck!
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