A Buyers Guide To Short Sales: 4 Things To Consider
A short sale could be your pot of coal
or hidden gold
When a home’s value drops to the point where the mortgage is less than its worth, both the bank and the borrower are faced with an undesirable dilemma. The borrower may want to walk away from their home and mortgage because they would owe nothing; however, this can come at a cost since a deficiency judgment may be issued against them. Meanwhile, the bank could foreclose on the loan, but they may have difficulty recovering what they’re owed due to the low value of the property.
All parties are helped by a short sale – in which the bank accepts less than what it owes. There is a benefit for both parties: the bank gets something rather than nothing; the homeowner is able to pay off their mortgage. By avoiding foreclosure, both parties save time and money. When it comes to short sales, there are some important steps you need to take as a buyer.
Prior to making an offer, make sure the property is in good condition.
As part of their evaluation of a short sale request, lenders examine the borrower’s financial situation first. At least two or three payments must be behind before the borrower can prove financial distress. Additionally, the lender will review the borrower’s liquid assets to see if they can be used to settle the delinquency.
Are you affected by this as a buyer? In addition to deferring maintenance on the property, borrowers who continuously default on their mortgage payments are more likely to defer servicing them. Maybe you need a new hot water heater, but you don’t have the money to buy one. Perhaps some shingles are missing from the roof or some electrical outlets aren’t working. If you’re buying a home that needs some work, this may work to your advantage, but you must also estimate how much repairs will cost.
Short-sale candidates must submit a property disclosure form that identifies any known issues, both obvious and not so obvious. The dining room is briefly flooded after a pipe bursts inside a wall. There must be a disclosure of that. Regardless of whether there is a visible problem, the seller should indicate that water damage may be causing mold behind the walls. Take a close look at the property disclosure form.
In a short sale, you usually have an open house or can schedule an appointment to inspect the house before it’s sold. Don’t miss out on this opportunity. An inspector may be able to make a comprehensive report of all potential problems. Drive by at least once.
Do some research on the title.
Any entity that has an existing legal interest in the property is listed on the title report, including current and previous owners. You will have time to review the preliminary title report once a successful offer has been made. Before a home can be transferred, liens must be satisfied on the property. Mortgages, for example, are liens. However, there are others as well. It is possible that a mechanic’s lien may exist on a home if the contractor has not been paid in full for any work performed on the home. The problem of delinquent property taxes, federal income taxes, and state income taxes can also arise.
A homeowner may have multiple mortgages (or even multiple loans), home improvement loans, or equity lines of credit. It is still necessary to pay off these liens in full or otherwise resolve them in a short sale. Short sales might be approved by the bank with the first mortgage, but not by the other banks.
There can also be issues associated with divorce. It is possible for the ex-spouse to remain on the title after a couple split up and a divorce decree is signed. To sell the home, the “ex” must deed the rights back to the resident.
Short sale experience is crucial when choosing a listing agent.
Many banks were ill-prepared to evaluate, approve and manage short sale requests before the housing debacle. The process of processing a short sale request has shrunk as more and more short sales occur today. Identify the listing agent’s experience dealing with short sales when you approach them. The “SFR” designation indicates that a real estate agent is certified in short sales and foreclosures.
Sellers’ agents should be familiar with the short sale process and the documentation banks require, as well as what steps need to be taken. If the agent and the owner do not follow proper bank protocol, the short sale request may be bungled, delayed, or even denied.
Apply for financing and get preapproved.
You want your offer to appear as appealing as possible when a bank first evaluates it. Your ability to close on time must be proven to the bank. You should include an approval letter from your lender with your signed sales contract. A lender’s letterhead along with your loan officer’s contact information should accompany the letter, which should highlight the amount for which you’re qualified, which coincides with the amount for a short sale.
When issuing your approval, your bank should also indicate the items they reviewed. Your income, assets, and credit have all been evaluated and approved, and all that’s needed is your property address. The letter need not include how much you earn or how much you have in your bank account. Exactly as described in the contract!
You’ll still need a pre-approval letter from your lender before bidding if you’re the winning bidder, so make sure you get one before you bid. Your dream home will be yours once you’re ready to bid!