Anytime a buyer has a binding contract on a short sale they run the risk of the seller’s lender not approving the short sale. Having negotiated hundreds of short sales, we’ve compiled a few other situations that all buyers and potential buyers need to be aware of since they could affect the outcome.
Closing Costs: Lenders follow very stringent guidelines for how much they will pay in closing costs. You see, the lender pays the closings costs, not the seller. The seller does not have money to pay closing costs. The lender is already facing a loss in accepting a payoff for less than is owed, so they want to minimize their other costs as much as possible.
The buyer’s lender should be familiar with the rules the shorting lenders follow for determining what they will pay in closing costs and should take this into account when doing a pre-qualification or pre-approval . For example, if the shorted loan is insured by FHA, and the new buyer is getting an FHA loan they will allow some closing costs. But, if the new buyer is pursuing either VA or conventional financing, FHA will not pay any closing costs. And as we’ve stated earlier, the seller can’t pay any. No matter what the buyer’s lender says or proposes those two facts will not change.
HUD: The seller’s lender will not allow any closing costs to appear on the HUD if they, nor the seller, are paying actual closing costs. As a buyer, your lender cannot make this happen.
Sales Price: The sales price can be whatever is agreed upon between the parties; the shorted seller’s lender will want as high a sales price as they can get in order to offset their loss. The seller’s lender can counter at any time, including after an appraisal or BPO.
Foreclosure: The seller’s lender can decide at any time to foreclose on a house – sometimes abruptly and sometimes in the midst of negotiating a short sale on a binding contract.
Seller Cooperation: When faced with a short sale or possible foreclosure, homeowners will all react differently. Some have resentment and anger that they take out on buyers by not being cooperative in having their house shown or making access available. They are in violation of their listing agreement and it’s only a matter of time before that agreement will be terminated by the listing agent.
Tenants: Sometimes it’s not the homeowners who don’t cooperate, but their tenants. Tenants often times find themselves in the middle and being forced to move when they don’t have the means. They can make it difficult for the home to be shown or will make the actual showings uncomfortable.
Double Dipping: When doing a short sale, home owners are not to be pursuing alternative solutions, such as a loan modification. The lenders will not allow both at the same time and more often than not, the loan modification or any other alternative solution, will put a halt to the entire short sale, binding buyer or not.
Repairs: When the buyer is getting an FHA or VA loan for a short sale, the seller will not be making any of the lender-mandated repairs. Buyers need to anticipate the need for repairs in order to bring the property to eligibility status for these lenders. A thorough inspection, at the time of binding, with an inspector familiar with FHA and VA eligibility guidelines would be the best investment. Sellers that have at their disposal a pre-inspection report available can help buyers prepare financially for the eligibility requirements.
The key to having a successful short sale purchase is to work with a realtor who is well-versed, even an expert in short sales. The more they have done, the better they are to handle your case. Also, for buyers, it is important to use a lender who is very knowledgeable of financing short sale purchases so that they are familiar with the procedures involved in shorting an existing mortgage and what the shorted lender will and will not do.
Anita Kummer, Buyer Department Manager, Duffy Realty
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