Short sale inventory has increased as forbearance-era protections have expired and some homeowners find themselves unable to sell for enough to cover their mortgage balance. For buyers willing to navigate the extended timeline, short sales can represent value. MLOs who understand the financing nuances of short sale transactions can set accurate expectations and protect buyers from deals that fall apart at the wrong moment.
How Short Sales Affect Closing Timelines
The single biggest challenge in short sale financing is the timeline. The lien holder must approve the short sale price before the deal can close, and this review process can take 30 to 120 days or longer depending on the servicer, the number of liens, and whether PMI is involved. Standard rate locks are 30 to 45 days, which is almost always insufficient. Buyers need to be pre-approved and in position to order an extended lock or float-down option once short sale approval is received.
Loan Program Considerations
- ✦FHA: buyer waiting period for FHA financing after experiencing a short sale is 3 years from date of sale; this is not a restriction for buyers of short sales, only for sellers
- ✦Conventional: no program restriction on purchasing a short sale; the property just needs to appraise and meet standard condition requirements
- ✦VA: no restriction on VA buyers purchasing short sales
- ✦Appraisal: the buyer's lender may not accept a purchase price approved by the seller's servicer if the appraisal comes in below the servicer-approved price; this requires renegotiation
Rate Lock Strategy for Short Sale Buyers
Pre-approve the buyer fully, including credit, income, and asset verification. Do not order appraisal or lock the rate until short sale approval is received in writing. Once you have the short sale approval letter, determine the servicer's closing deadline and lock accordingly. Some lenders offer a short sale specific lock that begins only upon written approval -- this avoids expensive lock extensions on deals that are still awaiting servicer sign-off.
Aria at vicariointel.com can walk through program-specific considerations for short sale purchases including which lenders have expedited short sale closing timelines and what documentation is required from the seller's servicer.
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