Buying a short sale home has become a little easier as of 2012, as lenders have loosened the reigns in the often drawn-out short sale approval process. Short sales became the preferred way of disposing of bad assets when they surpassed bank foreclosure sales and accounted for 25 percent of all home sales. A short sale transaction involves selling a home for less than the balance owed on its mortgage. Buyers seeking a bargain can get a short sale for about 25 percent less than a non-distressed sale. Buying the home with a loan insured by the Federal Housing Administration (FHA) can save you additional money up-front on the down payment.
Pre-qualify with an FHA-approved lender. Whether you choose a mortgage broker or commercial bank, the lender must be approved by the Department of Housing and Urban Development (HUD) to participate in FHA programs. The HUD website maintains a list of approved lenders and the insurance programs they specialize in. It is best to get pre-qualified for the loan before searching for a home so that you know exactly how much you have to spend. Short sale brokers and sellers typically want to know that you have your financing in place before they will consider moving forward with your offer.Step 2
Complete a loan application and provide the lender with your financial documentation, including most recent W-2s, tax returns, pay stubs and bank statements.Step 3
Shop for a short sale based on your pre-approved loan amount. It's generally better to look for a home below your maximum price range. This allows you a margin for negotiating the sales price and allows you to increase your sales price if the lender requires you to in order to approve the short sale.Step 4
Wait for the lender to respond to your offer with either a counter offer, approval or rejection. If the sale is not approved according to the contract terms set forth in your original offer, revise your offer accordingly. This may entail increasing the sale price or reducing or removing certain conditions. Consult your real estate broker for advice on how to change your offer.Step 5
Pay for the FHA appraisal inspection. Your lender will require an interior and exterior inspection of the home by a HUD-approved appraiser. The appraiser denotes any flaws or repairs needed to meet FHA guidelines and gives the lender an opinion of value. The home must pass the FHA appraisal to gain approval for the loan. The appraisal typically costs between $300 and $400.
- Short sales often require substantial home improvements because of deferred maintenance, abandonment or vandalism by the financially distressed home owner. FHA offers the 203(k) Rehabilitation program for the acquisition and renovation of such properties. It combines a purchase-money loan with a construction loan, allowing the borrower to complete two tasks without the cost and hassle of obtaining two separate loans. The 203(k) loan process is similar to that mentioned in Steps 1 through 5, but involves the additional step of property re-appraisal and an escrow repair account from which to draw repair funds.
- FHA-insured loans are intended for owner occupants, not investors. It's low down payment requirement of 3.5 percent is intended to help borrowers of modest means, but the increased FHA limits in certain high-cost areas of the country mean borrowers with higher incomes can also benefit from the program. To circumvent the use of its insurance to build an investment portfolio, FHA only gives one loan to a borrower at a time. It requires that the borrower establish occupancy within 60 days of getting the loan and live in the home for the majority of the year.
- Bloomberg: Short Sales Surpass Foreclosures as Banks Agree to Deals
- HUD: FHA Lender List
- CBS News: Banks Stick to Short Sales in $25B Settlement Relief
- Huffington Post: FHA Loans Meant For Low-Income Borrowers Going To The Wealthy
- Bankrate: What to Know About FHA Loans
- HUD: Handbook 4155.1: Chapter 4, Section B: Property Ownership Requirements and Restrictions (p. 4-B-5)
- HUD: Rehab a Home w/HUD's 203(k)
- Loan.com: The Average Cost of a Home Appraisal
- Thinkstock Images/Comstock/Getty Images