As anyone looking to buy a home in California knows right now, many (if not most) of the properties on the market are short sales. For those who do not know what a short sale is, it is a sale where the seller has a mortgage balance of higher than they are selling the property for, and they are negotiating with their mortgage holder to take less than they owe. Short sales present some of the best deals at the lowest prices in the market. This post will discuss purchasing these short sales in California with a FHA home loan.
Below is a brief overview of the stages of a short sale purchase:
1. Short sale seller contacts a Realtor and indicates their desire to sell with a short sale and Realtor pre-qualifies if seller is likely to be approved for a short sale
2. Realtor puts the property on the market and finds a buyer
3. Realtor submits the buyers purchase contract + the sellers short sale package to the lender (this is where you need patience, it can take lenders 3+ months in most cases to get the written short sale approval)
4. If everything goes to plan, seller’s mortgage holder delivers written approval of the short sale and accepts your purchase contract (this is really where you know you have a deal and the timelines begin to close)
5. After step #4, you should have 30 days or more to do all of your inspections on the property, get you loan fully approved and close on the property and get the keys
What I wanted to touch upon in this post is the timeline of a short sale and two important boxes to check on part of your short sale purchase agreement called the “Short Sale Addendum”, to protect yourself when you get FHA loan as your financing to buy a short sale in California.
The key with short sales is from the date you get your purchase contract accepted, it can take usually 60 days at the soonest, to 3-9 months until you close on a short sale. So go back to the numbered steps above, and you need to realize you really do not know you have a deal until step #4. So in the “Short Sale Addendum” to the purchase contract, you need to check 2 boxes under section B 1 & 2. Those boxes to two things:
1. They make sure your contingency release time periods for your inspections, loan approval, appraisal and more, do not begin until the seller delivers written approval of the short sale by the sellers mortgage holder(s). There are likely two different lenders in a short sale because so many loans in the past had 1st and 2nd mortgages, so you will need written approval from both.
2. The second box checked makes sure your earnest money deposit is held uncashed until the day after you are delivered written approval of the short sale by the seller’s mortgage holder(s).
These are both very key boxes to make sure you check. Because once again, you don’t really know you even have a deal until you get that written short sale approval. So none of the timelines in your contract should start until you get that written approval. And you should make sure you have at least 30 days, if not 35-40 days, to close from the date you get the written approval.
I hope this helps you to understand a little more about buying a short sale property in California and protecting yourself when you use FHA loans in California to purchase short sales.
And here are some reminders of highlights of FHA loans in California:
- FHA loan credit score minimum is generally about 620, it gets much more difficult to qualify FHA loan below this score. Conventional loans require a 720 score for 10% down, so 620 is very forgiving.
- FHA home loan requirements for qualification are much more relaxed than 10% down conventional loans with 55% debt ratio and 620 credit scores vs. 41-45% debt ratios and 720 scores for conventional
- FHA max loan amount is $729,750 in the coastal areas of California such as San Francisco, San Jose, San Diego, Orange County, Los Angeles and Santa Barbara
- FHA loan down payment is 3.5% which is the lowest of any mainstream mortgage loan out there today
Give me a call (858-922-7899) or email (homeloan8@gmail.com) if you have any questions at all about getting approved for a FHA, VA or conventional Loan.
Warmest Regards,
Rob Chomentowski
Sr. Loan Officer (and FHA specialist)
858-922-7899
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