On the surface, a short sale seems like the perfect deal. However, before you take the plunge, you need to understand how this type of home purchase works.
What Is a Short Sale?
A short sale is a home sale in which the homeowner is selling the home for less than he or she currently owes on the mortgage. In most cases, this means that the buyer is paying less for the home than it’s worth, which leads to instant equity.
Short sales allow homeowners to get out from under mortgages without damaging their credit as much as a foreclosure. Lenders often agree to short sales because the foreclosure process is lengthy and expensive, so short sales can be more beneficial for both parties in the long run.
Advantages
When you buy a short sale, you can often get a nicer home for a lower price. In most cases, you will still be able to use financing to purchase a short sale.
A homeowner attempting a short sale also tends to be highly motivated, which means they will be willing to negotiate on almost any aspect of the sale.
Disadvantages
Although purchasing a short sale can be lucrative, the process isn’t easy. Short sales can take as long as nine months to complete, which is much longer than the time required for the typical home purchase.
Because the homeowner owes more on the mortgage than you will be paying, the bank must agree to the price. This means that even if the homeowner is willing to accept your offer, the bank can still reject it.
If the home secures more than one mortgage, all of the lenders must agree to the sale before it can close. This can lengthen the process even more.
Even though the bank will hold up the process, they will want you to be flexible. Banks are less likely to approve offers from buyers with multiple contingencies, such as a house that needs to sell before closing.
Should You Purchase a Short Sale?
The decision to make an offer on a short sale home is personal. Although there are many obstacles and potential disadvantages, you may be able to save money and build equity quickly if you are able to complete a short sale successfully.
Keep in mind that most banks considering a short sale will want to see a well-qualified borrower who offers flexible closing terms, so it’s best to contact your mortgage professional for a pre-approval before you make an offer on the home.
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About the Author:
Babak Moghaddam graduated from University of Southern California in 1985. He entered the mortgage industry as a compliance auditor at the Bank of New York in 1986 and completed his masters in Business Administration two years later. After seventeen years in the traditional mortgage banking world Babak finally transformed this vision into his own practice in 2002 when he formed Charter Pacific Lending Corp, a mortgage company that has provided over $900 Million in residential real estate loans throughout Southern California. Babak and his team do things a little differently than other mortgage providers. They work as financial advisors, because they have come to realize that a mortgage is a very powerful financial tool. And just like any other financial tool, it should be managed as part of the overall financial management plan to reach every home owner’s long and short-term financial goals much faster. You can contact Babak for a free consultation and strategy session at (800) 322-1217 X103.