Home > 2015 > Mortgages

Why Short Sales Are Still Some of the Best Deals Around

Advertiser Disclosure Comments 0 Comments

Talk to anyone who has dabbled in real estate in recent years and they will almost certainly have an opinion on short sales. Though it’s not as common anymore, homeowners short-selling their homes present an opportunity for you to get your foot in the door. Here’s what you need to know if you want to buy a short-sale home.

What Is a Short Sale?

A short sale is a transaction in which a homeowner is selling their home for less than what they owe on the property. The bank with the loan against the property must agree to be shorted the original dollar amount lent to the homeowner. Not always, but in most instances, short sales can also be identified as pre-foreclosures. A pre-foreclosure is a situation in which a homeowner has stopped making the mortgage payment, with the foreclosure process then following suit.

Banks can be reluctant to grant short sales unless there is some form of financial hardship causing an inability to afford the mortgage payment. Short sales used to take upwards of six to eight months for a bank approval. If there was more than one lender on the home such as a first mortgage and a second mortgage, the process would take longer. That time frame has changed. It is now reasonable to expect a short sale to take about three months from the time a purchase contract is presented to the bank for approval. Unlike a foreclosure where you’re dealing strictly with a bank, with a short sale you’re dealing with the bank and the owner of the property. So while the bank holds all the cards, you’re also dealing with a human being.

Getting Bank Approval

The bank usually will approve a short sale transaction if the cost of letting the home go to foreclosure is greater than the short sale loss. This is critically important because a bank would not approve a short sale if there is equity in the transaction, as they can take the house back and profit by doing so.

The bank has to agree to lose money by allowing the short sale. Because of this, time can be the short sale culprit. On the hunt for a house? Fortune favors patient buyers and here is why: Many homebuyers do not have the stomach to handle a potentially long, drawn-out process to purchase a home under short sale terms, let alone the hoops they may have to jump through when the bank signs off on the approval.

Why They’re a Deal for Home Buyers

Short sale properties can be worth your while because you have less competition coupled with a haircut price. Done correctly, it is possible to buy a short sale house for below market price, or at minimum a reasonable price given the location and home specs.

When the bank receives a short sale request from a homeowner, the bank does what’s called a BPO (Broker Price Opinion), which is simply an opinion of what the house is worth from a local real estate broker. The bank uses this BPO when setting the short sale amount. The BPO always has variances in terms of the valuation, similar to a home appraisal, it is merely an opinion of value. A short sale house with less competition may entertain a slightly lower offer — usually within 10% of the list price. This will be determined by the location, neighborhood and home details: bedrooms, bathrooms, square footage and lot size. The makings of a good short sale opportunity could be a house in need of minor TLC (which affects the BPO) in a desirable location.

How to Find Short Sales

The best way to find short sales, other than word-of-mouth, is to use a good real estate agent. A true expert will have deep, embedded connections in the community within the area you are looking to purchase. Real estate agents also connect with other real estate agents both in their office and at broker tours, prompting news of upcoming possible “pocket listings.” Pocket listings are houses that never actually hit the market, which means zero competition for you.

Financing a Home With a Short Sale in Your Past

If you have previously short-sold a home in the past seven years, and you’re looking for a conventional mortgage loan, you’ll need 20% down (or equity) and four years since the short sale transfer date. Don’t have 20% down and still have a short sale in your past? You can apply for an FHA loan, and then it’s a three-year wait time from the short sale transfer date with only a 3.5% down payment (or equity) requirement.

Fannie Mae & Freddie Mac are still gun-shy about lending to short sale borrowers. If a previous short sale is affecting your ability buy a home, focus on improving your credit, increasing your down payment and paying off debt — all of which will significantly bolster your qualifying ability when the clock is up. You can see your free credit report data on Credit.com, and get a plan for improving your credit. You can also check this tool to see how much house you can afford.

More on Mortgages & Homebuying:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team