Lee Morof's Real Estate Blog

As a potential home buyer, you are probably familiar with what a typical sale looks like. You probably also have a basic understanding of what a foreclosure is and how it works. Another type of sale that may be less understood is called a short sale.

These sales are not as popular in the market, but you may come across a few. You may even fall in love with a home that is listed as a short sale. What does this mean for you as the buyer? These are the basic facts that you need to know about these homes and the process for purchase. 

What Is A Short Sale?

A short sale is negotiated when the lender for the current homeowner’s mortgage agrees to list the house for a smaller mortgage payoff amount. This means that they will be taking in less money than what is owed on the property in order for it to sell quickly on the market.

This usually happens when the current owner of the property, the seller, is in a distressed financial state. There are many reasons why a seller may have lost the ability to pay their mortgage, such as losing income or unexpected expenses. Maybe the owners are going through a complicated divorce and need to unload the property. Regardless of the reason, the lender has an incentive to remedy this situation.

How Does It Work For The Buyer?

When it comes to purchasing a short sale property, the process is not much different than purchasing any other home on the market. The lender will want to make sure that you will be able to complete the purchase, especially under these circumstances, so you will likely need to be preapproved or prequalified before your offer can be accepted. 

One major difference is that the process is typically more drawn out than if you were making a traditional home purchase. Even though it is called a short sale, it is not something that happens very quickly. In fact, it can take an average of 2 to 4 months for a short sale to be approved and for the actual closing to take place. 

Now that you understand the basics of a short sale and how it works, you can decide if it is something that may fit into your criteria and timeline. If so, and you do find a home you love, you should not let something like a short sale stop you from getting it. Your real estate agent can help navigate you through the process to make it as simple as possible. 

When you are purchasing a home, your lender may recommend you obtain a mortgage pre-approval before you find the home of your dreams. There are some benefits to being pre-approved before you find a home, but oftentimes, people confuse pre-qualifications with pre-approvals.

So the question many buyers have is what exactly is a mortgage pre-approval? In a nutshell, it’s when the lender provides you (the buyer) with a letter stating that your mortgage will be granted up to a specific dollar amount.

What Do I Need For Pre-Approval?

In order to obtain a pre-approval for your home purchase, you will have to provide your lender all of the same information you would need to show for qualifying for a mortgage. This means providing tax returns, bank statements and other documents that prove your net worth, how much you have saved for your down payment and your current obligations.

What Conditions Are Attached to a Pre-Approval?

Generally speaking, a pre-approval does have some caveats attached to it. Typically, you can expect to see some of the following clauses in a pre-approval letter:

• Interest rate changes – a pre-approval is done based on current interest rates. When rates increase, your borrowing power may decrease
• Property passes valuation and inspection – your lender will require the property you ultimately purchase to come in with a proper appraisal and meet all inspection requirements
• Credit check requirements – regardless of whether it’s been a week or six months since you were pre-approved, your lender will require a new credit report. Changes in your credit report could negate the pre-approval
• Changes in jobs/assets – after a pre-approval is received, a change in your employment status or any substantial assets may result in the pre-approval becoming worthless

What Items Can Change My Mortgage Pre-Approval Status?

One of the major issues that affect some borrowers as they are preparing to purchase their new home is financing large ticket items before the home purchase loan is completely funded.  Even if you are buying new furniture or other items for the home, it’s best to wait until after your home loan is entirely complete before purchasing any of these new items.

Work changes can also drasitically affect your pre-approval status.  Make sure your loan professional is well aware of any changes well in advance of them happening in order to plan effectively.  There are ways to work with job changes but it is a delicate matter during the mortgage underwriting process.

Getting pre-approved for a home mortgage may allow you more negotiation power with sellers and may help streamline the entire loan process. It is however important to keep in mind there are still things that may have a negative impact on actually getting the loan.

It is important to make sure you keep in contact with your trusted real estate professional, especially if interest rates increase or your employment status changes after you are pre-approved.

Often times, home buyers can be disappointed when they find their dream home only to discover they are not able to get a mortgage to purchase the property. There are methods that potential buyers can use to ensure this does not happen to them.

One of the options is to ensure you obtain a pre-qualification from your lender. It is important to understand the difference between a pre-approval and a pre-qualification. While both are helpful, they do not carry the same weight.

What are the differences between these options?

A pre-qualification allows a borrower to determine how much money they may be able to borrow. For most borrowers, this allows them to start the house-hunting process with a mortgage amount in mind. Borrowers should understand, while the loan amount can be calculated, changes in interest rate as well as the borrowers credit are not evaluated in this process.

In general, the lender will request specific information from the borrower including income and expenses as well as ask about their credit. None of this information is typically verified by the lender through an underwriting process before sending a pre-qualification letter.

On the other hand, a pre-approval requires the borrower to provide a number of documents to the lender, typically the same documents borrowers need to apply for a loan. The documentation supplied to the loan professional is then treated as a full purchase loan application and run through underwriting to secure a conditional commitment from a bank or mortgage lender.

Oftentimes, this difference between the two options leads borrowers to speculate as to whether a pre-qualification is useful.

Why pre-qualification helps in your home hunting?

There are many valid reasons why potential homebuyers should ask about pre-qualifying for their mortgage. Some of these include:

• Home prices – if a borrower is eligible for a mortgage of $200,000 they will know they will have to seek homes in a specific price range. If a borrower is only able to put down 10 percent, they know the maximum home price they can afford is $220,000.
• Down payments – in most cases, borrowers who can afford to put down a large down payment will have more options available to them. In some cases, understanding how much mortgage a borrower may qualify for beforehand allows them to save additional money for a down payment.
• Estimates of dollars needed – another advantage to pre-qualifying is borrowers can get an idea of what additional closing costs they may need to qualify for a mortgage. This can be very helpful for a first time home buyer.

Pre-qualifying for a loan can save a home buyer from being disappointed. There are few things that are more upsetting than finding a home you love only to discover you are not eligible for the loan you need in order to purchase that home.

Typically, when you are seriously looking for your next home it would be a good idea to move to the full pre-approval process in order to get the most leverage when you find the home of your dreams.

As always, it’s a good idea to consult with your trusted real estate professional for advice when preparing to look for your new home.