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Is a Short Sale Good for a First-Time Homebuyer?

by Jayne Thompson

A short sale happens when the seller persuades his lender to accept less than the outstanding loan amount in full payoff of his home mortgage loan. Short sales can be good deals for first time buyers. The seller of a short sale property might not have kept up with routine repairs, making many short sale properties fixer-uppers and giving first time buyers the prospect of an excellent price. But there are also pitfalls to buying a short sale property.

Short Sale

A short sale arises when a seller wants to sell his home, but his home is worth less than the amount he owes on his mortgage. If the seller can persuade his bank to accept the "short" sales proceeds, you're in a short sale situation. A short sale might be "short" in money, but it is certainly not "short" in time, nor is it always easy. The approval process can take an extremely long time, with the homebuyer effectively in stasis until the lender approves the deal. The lender is in control of the transaction, and the buyer is forced to comply with the lender's terms.

Advantages

The bank might be taking a hit on its loan, but a short sale is often the most cost-effective option for the lender and preferable to foreclosure. Many banks offer good mortgage deals to the short sale buyer to secure the deal. A short sale seller will also be keen to reach closing, to avoid damaging his credit rating. This means that the seller and lender should be willing to cooperate to get an approved deal. The homebuyer may also secure a lower than usual price -- great news for a first time buyer. A word of caution though: Banks look to minimize their loss. They will always carry out an appraisal and review the selling prices of comparable homes to ensure that your offer is competitive. As Realty Times puts it, lowball offers get slow or no response.

Disadvantages -- Time

Banks don't agree to short sales lightly. The borrower is asking his bank to give up money that is owed, and banks will only do that in very specific circumstances. The seller must prove that he has a valid financial hardship and needs to sell. The lender conducts various reviews on both the borrower and the property to ensure that the short sale is the best possible option. All of this takes time -- several months, according to Freddie Mac, particularly if junior lien holders are involved. The homebuyer needs to be patient during the approval process; and of course, there's no guarantee of a "yes" at the end of it.

Disadvantages - Cost

The homebuyer might be getting property at or below its fair market value, but it will be purchasing the home on an "as-is" basis. This means that the bank gives no warranty about the condition of the property and will not meet the cost of a home inspection, or any repairs disclosed by the buyer's own inspection. The bank will also want proof that the buyer is able to close the transaction before accepting the buyer's offer. They might require a large earnest money deposit or a mortgage preapproval letter.

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