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How can you buy a home in a short sale?


The Application Process
Make sure your contract includes a stipulation that says it only takes effect after the lender's approval.
Make sure your contract includes a stipulation that says it only takes effect after the lender's approval.
Hemera/Thinkstock

When picking a short sale home, check your broker's listings, online search engines and local ads for listings of approved short sales. These are the best listings for the buyer, because the seller has already negotiated a price with the bank. Approved short sales will save the buyer most of the steps we'll describe next [source: Foust]. Most listed short sales will require bank approval, so it's a good idea to take listing prices with a grain of salt. They could be priced low to entice buyers, and you could end up paying more in the end [source: Fontinelle].

You should also consider what repairs might be needed, since they will be your responsibility. A dirt cheap listing might not be worth it if you have to spend thousands of dollars on renovations. Also, find out early about any secondary lenders on the house, including second mortgages. Secondary lenders will need to approve the deal, also, which can complicate the transaction [source: Foust]. When the time comes to negotiate a price with the seller, proceed like you would with any other home purchase, with one crucial difference. Once you agree on a price, make sure your contract includes a stipulation that it only has effect after the lender's approval, for your own protection [source: Fontinelle]. Purchase contracts are legally binding, so putting in that clause protects both parties from being sued by the other if the deal falls through [source: Evans].

After you agree on a price with the seller, you need to submit an application to the bank. That application will include the signed contract, a letter from the seller authorizing the lender to discuss the mortgage with a third party (you), your basic identifying and financial information, and an appraisal of the home's value. You should also submit detailed documentation, including photos and cost estimates, for any needed repairs. This will help persuade the lender that foreclosing would cost them more money than cutting their losses now. Finally, the seller will need to provide a hardship letter explaining why they will be unable to repay the loan, along with financial documentation to back it up [source: Dempsey].

Once you submit your offer and application, the lender can take its time replying. It might be months before you hear anything, and they could reject it without negotiating, or completely ignore it [source: Fontinelle]. So, be prepared to negotiate if they give you a counteroffer, and have a firm ceiling in mind [source: Dempsey]. While you wait to hear back, you might want to continue your search. Short sales, even more than other types of home sales, are never a sure thing.


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