What Does Buying a Short-Sale Home Entail -

When a homeowner experiences financial difficulty, they may sell their property for less than the amount due on their mortgage. This real estate sale type is called a “short sale.” This is not to be confused with a foreclosure when a lender seizes property from a borrower who has failed to make payments.

Buying a short-sale home could mean you can find a house for less money. However, the process is unique and may be more time-consuming than buying a house listed at market value. If you are considering buying a short-sale home, you must know the process. How does the process differ, and what are the steps? Read below to learn what to expect when buying a short-sale home.

What Is a Short Sale?

As stated, a short sale occurs when a homeowner in financial distress opts to sell their house for less than the amount due on the mortgage. But who takes care of the remaining balance? In the case of a short sale, the mortgage lender decides whether to forgive the difference between the sale price and mortgage or to pursue the seller for a deficiency judgment, in which they are required to pay the lender the difference. This depends entirely on the state, as it’s illegal for a lender to seek the remaining balance in some states, and the debt must be forgiven.

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But what is your role as the buyer? In a short sale, the buyer is considered the third party, unlike the bank in a traditional sale. All of the profit goes directly to the lender.

Find a Short Sale Home

A mortgage lender must approve short sales. Though most properties are listed as short sales by real estate agents, not all are. If it’s not listed as a short sale, then check if the listing requires approval from a bank or credit union. It is likely a short sale if it’s subject to lender approval.

Buying a short-sale home is often more complicated, requiring more time and paperwork. It’s helpful to have a real estate agent who is experienced in short sales and can help guide you successfully through closing. They will understand a competitive price based on what is owed to the lender and a realistic timeline.

Expect to Wait

Though some of the processes of a short sale are similar to buying a home at market value, they can take much longer to close. After making an offer, you must wait for the lender to approve. This can take weeks or even months. If multiple lenders are involved, it can take even longer. This step stalls some buyers, as they get stuck in the approval stage and decide to cancel their offer.

If you are interested in a short-sale home and are prepared to wait, you will approach it like any other sale. First, get pre-approved or pre-qualified for financing from a lender. You will want to choose a lender with competitive rates and make sure it’s a mortgage you can afford. If you are pre-approved, then you can submit an offer.

Submit an Offer

It’s essential to have all the proper paperwork in place so that nothing is missing and the process isn’t delayed further. This will need to include the seller’s short-sale package. Even though, as the buyer, you aren’t responsible for the short-sale package, it’s helpful to know what should be included by the seller so delays are avoided. The short-sale package should include a letter detailing financial hardship, financial statements, and documents reflecting their financial hardship (tax returns, payroll stubs, W-2s, and bank statements).

If the seller accepts your offer, this short-sale package will be included with the rest of the paperwork sent to the lender. The additional paperwork must contain:

The listing agreement.
A copy of the earnest money check.
An executed purchase offer.
The buyer’s pre-approval letter.

After the offer and necessary paperwork have been submitted, a buyer must wait for approval from the lender. Even if a seller has accepted an offer, the lender decides to accept or reject the offer.

Pros and Cons of Buying a Short-Sale Home

Certain obstacles may arise during the process. If the homeowner borrowed from more than one lender by taking out a second mortgage (a home equity loan), the second lender becomes a junior lienholder to the first lender. A short sale is not particularly profitable to a junior lienholder, who may block the sale.

However, if the sale is not blocked by the lienholder or canceled by the seller, a short sale can be a great way to buy a house for less money. They are typically in better condition than a foreclosure, making them less of a risk for a buyer to make more marketable if they choose to sell in the future.

Choose the Best Lender

If you are ready to purchase your next home, shopping around for the best mortgage lender is a good idea. Typically, credit unions offer better rates than large banks because they are not-for-profit. Another thing to consider is accessibility and convenience. Does the mortgage lender make the home loan process quick and easy?

If you are looking for a fast and affordable home loan process and you’re in Washington State, consider Solarity Credit Union. We believe buying a house is exciting, and we want your process to be fast, simple, and straightforward so you can focus on creating memories, not on paperwork. We even offer an eSigning Experience that allows you to close fully online. No matter where you are in the buying process, start the conversation today, and we’ll help make your dream home a reality.