5 Things Every First Time Home Buyer Should Know about Short Sales
For a borrower, a short sale, also referred to as a pre-foreclosure sale, means selling his home for less than the outstanding balance on his mortgage. For a first time home buyer, on the other hand, a short sale represents an excellent opportunity to purchase a home at a bargain price. Though short sales have gotten more common over the past few years, many home buyers have no idea what they’re getting themselves into until after several unsuccessful attempts to purchase a short-sale property.
A first time home buyer should keep in mind the following five points in order to secure a successful short sale.
- Short sales are different from foreclosures – Unlike a foreclosure, when the lender takes possession of the property and sells it directly to recoup the remaining mortgage balance, a short sale gives the homeowner the opportunity to sell his home at or near the current market value and pay off a portion of his debt in order to avoid foreclosure proceedings. Because the lender must approve the sale, short sales can take much longer than traditional real estate or foreclosure transactions. As surprising as it may seem, not all the sellers understand what a short sale is. Sometimes, distressed homeowners market their properties as short sales before actually defaulting on their loans. When this happens, lenders reject short sale propositions outright.
- A short sale can involve more than one lender – Prior to making an offer on a short sale, a first time home buyer should find out if there are multiple loans or liens filed against the property. This is very important because with short sales the collateral value usually comes up short. Since senior lenders are repaid first, the junior lenders may get just a portion of the outstanding loan balance, or worse, be wiped out completely. Therefore, if there is more than one lender, chances are they won’t approve the short sale.
- The buyer should choose a financing option – Before making a short sale offer, a first time home buyer must know exactly how he’s going to pay for the property. While getting a mortgage from the seller’s lender, who already has most of the information necessary on file, may expedite the loan application process, the home buyer should pay attention to the terms and conditions of the loan, and especially to the interest rate. As a general rule, a one-percentage point difference can make searching for a different lender and dealing with a longer approval process worthwhile. Let’s consider a 30-year fixed-rate mortgage on a $100,000 property, with a 20-percent down payment and a 6-percent interest rate. In this case, the monthly mortgage payment is $667. A 5-percent interest rate will reduce the monthly payment by about $50. Over 30 years, the borrower will save up to $18,000.
- Short-sale homes are often sold in “as is” condition – Basically, “as is” indicates the fact that the seller is unable to make repairs. Though a short sale allows a first time home buyer to get a piece of property for a substantial discount, most short-sale homes need major repairs. Thus, someone in the market for a short sale should have a home inspection performed by a licensed, experienced and reputable professional prior to making the final purchase decision.
- Home buyers should seal the deal as soon as possible – Once all the parties involved in a short sale reach an agreement, the home buyer should get everything in writing and recorded officially right away. Since dozens of documents must be collected, signed, submitted through certain channels, analyzed and recorded in a relatively short period of time, any delay can make the deal fall apart.
Purchasing a short sale can be frustrating and stressful. Therefore, as a first time home buyer you need to find a reputable lender committed to helping you reach your financial goals as you work toward successful home ownership. For more information on our home loan products and services, feel free to contact our experienced mortgage consultants at (904)-389-4635.