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Published February 21, 2020
Can a First-Time Homeowner Buy a Short Sale?
From time to time, I receive calls from buyers who ask about a below-market priced property listed often as a fixer or short sale. A typical message might be: “I am a first-time buyer and I really would love an opportunity to fix this property the way I want to and live in it. I would like to see this home.”
It’s a thrilling idea for many to purchase their first home, fix it up over time, and then make a nice profit later on when they sell. If buying a home that needs significant work is important to you as a first-time buyer, then you will first have to ensure you can be approved for the right type of loan product.
Let’s look at the available types of loan products to see how a first-time homebuyer can purchase a short sale property.
Types of FHA Loans
First-time homebuyers often qualify for some type of FHA loan. This mortgage product is insured by the Federal Housing Administration. It permits small down payments and lower credit scores.
Many first-time homebuyers will apply for a basic homeowner FHA loan (203 B). In this case, they can buy a standard, single family dwelling to be used as their primary residence. The property can be one- to four-unit structures, so a duplex qualifies for this type of loan.
In this case, the borrower must meet all standard FHA qualifications. They would be eligible for 96.5% financing and have the ability to finance the mortgage insurance premium upfront.
However, there is an annual premium each year you hold the loan. Also, depending on the area you live in, there could be a mortgage loan limit.
The cost of fixing up that dream home could really play havoc with your savings. When you realize how much it costs to remodel, you might think twice. However, your lender may be able to help you fund that short sale fixer with a FHA 203K loan product.
This is a loan product that is backed by the government and provides a way for buyers to purchase a “damaged” or older home and do repairs on it. In this case, the lender would give you the money to buy or (refinance) the house plus the additional money necessary to undertake the remodel.
The loan may include a “contingency reserve” so you have the funds to complete your project even when the project exceeds budget. The reserve may even factor in six months of mortgage payments so you can live elsewhere while you are remodeling and still be able make the mortgage payments on this home.
Because there is more than one kind of 203K loan, it's important to ask for the right one for you. The first is the standard 203K loan, which is used for homes that need structural repairs and remodels. The work might include garage, landscaping, and other structural fixes.
The second is a streamlined (limited) 203K loan, which is used for energy conservation projects like roofing and appliances as well as non-structural repairs like painting. With this type of loan, you can borrow up to an additional $35,000 with no minimum repair costs for energy improvements. To do so, however, may require an appraisal. Your required down payment is 3.5% of the total borrowed amount. Those funds can even come from a family member, employer, or another source.
With a FHA 203K loan, the minimum amount you can borrow is $5,000. The maximum will depend on the FHA Mortgage Limit or the appropriate Loan to Value (LTV) ratio from purchase Loan-to-value limits. Other restrictions may apply so ask a trusted lender. Also, keep in mind your other debt and existing fees on the loan.
Conventional Loans
Now, let’s look at conventional loan products. If you have exceptional credit and a larger down payment, then you should consider using a conventional loan to purchase your short sale property. Using a conventional loan will save you money because you can avoid paying mortgage insurance.
Conventional loans are not insured or guaranteed by the government. Insurance is usually paid by the borrower.
Getting Your Short Sale Property
In my experience, when presenting your offer on a short sale, the seller may decide to go with the buyer that has a conventional loan or cash to buy their property outright over someone with an FHA loan approval. Of course, these decisions are on a case-by-case basis, which makes it worth putting that offer in no matter what type of loan qualification you take.
For more information on how to purchase a short sale or foreclosure, contact Liz Jones of the Jones Realty Group So Cal at Keller Williams Realty. Or, you can visit our website at www.jonesrealtysocal.com.
