Can a buyer using a fha loan buy a short sale?

Asked by Novella Henry, Ellicott City, MD Sun Jun 29, 2008

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Clarabellae, Home Buyer, South Miami, FL
Wed Jul 22, 2015
Short sales often require substantial home improvements because of deferred maintenance, abandonment or vandalism by the financially distressed home owner. FHA offers the 203(k) Rehabilitation program for the acquisition and renovation of such properties. It combines a purchase-money loan with a construction loan, allowing the borrower to complete two tasks without the cost and hassle of obtaining two separate loans.

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3 votes
To Mantlerc in Ontario,
The $108K price for the Pole Ridge Rd project is actually a good deal for someone who can pay cash and has more to do the repairs. 4200 sq ft and 5+ acres! Sounds fantastic, doesn't it? The problem with this property is the current condition. A conventional or FHA conventional loan won't work when the property is not habitable. This needs a 203(k) or Home Path rehab loan. This property is NOT appropriate for a normal homeowner to tackle; the final rehab cost will probably be triple what most homeowners calculate. Based on your comments, including the 'solar would be good' (good for a secondary back up, not a primary system) you should probably look for a less ambitious project. If you are not a well experienced rehab contractor, you will probably get in big trouble with a project of this scope. The number of well meaning people I have seen go broke by taking on projects like this is heart breaking.
Flag Wed Dec 2, 2015
I want to purchase a home in Avon, NY. It has been up for auction, it never sold. I know it needs septic, electric, and a heating system (solar would be good). It is now listed for $108,000, in the real estate market (2161 Pole Ridge Road, Avon, New York). This house is currently overpriced; it is only worth about $50,000; the way it sits. I really would like to purchase the house; I live in Niagara Falls, Ontario, Canada, and I am looking to buy a home; and move back to New York state.
Flag Wed Dec 2, 2015
I just asked a question via the link above:
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jj, Home Owner, Lynnwood Subdivision, Lynn Haven, FL
Fri Mar 12, 2010
The answer is yes, absolutely. Is it probably the best option? Maybe not.

Typically FHA buyers are stuck with a strict set of parameters and price points. They can be tight on debt to income ratios and not flexible in moving up in price if necessary. The sellers lender often times will counter the originally agreed upon offer, and then what? If you cannot move on price, then time has been wasted by all and the seller could end up in foreclosure if there is a sale date looming.

I just had an offer on one of my short sale listings. It was a condo in Lynnwood. The offer was within a few percent of asking price and only on the market a few days. The buyer was FHA and they wanted more in closing costs than their down payment. The agent for the buyer mentioned that they NEEDED this closing cost money to do the deal and hoped the bank would make it work for them.

I did my best to explain that the bank can and will counteroffer the deal and that it is my job to justify the price and offer with my own BPO and appraisal that is submitted to the lender and actually negotiate rather than just sit back and take what the bank throws at me. They backed out of the deal within 6 hours of sending over the offer.

So, in my humble opinion, most of the time, it is not a good fit. Can it work, yes! Absolutely. Will I work with someone who is an FHA buyer and they really love the house and want it? Yes, I am right now and we are awaiting the banks response. However, I make sure the buyer knows the pitfalls that can take place and assure them that I will do my best for them, but try to manage expectations in such a way that they are not devistated if the deal falls through.

It is unfortunate that the people willing to actually pay market value for some of these short sales are the very people who may not be the best candidate for the deal to go through.
3 votes
Ronda Allen, Agent, Plano, TX
Mon Mar 15, 2010
You can. Keep in mind, though, that lender required repairs (if any) may play a part in the deal, and could be at your expense. One example, I had a buyer in 2009 who purchased a home in short sale. The seller agreed to their FHA loan. The lender required that the back door to the house be painted (a family pet had scratched up the back door, leaving exposed wood). The buyer, at their own expense, purchased the paint and painted the back door. They considered this a small price to pay for the deal to go through, and the seller was not in the state or willing/able to invest any money into this home. The deal closed to the satisfaction of both the seller and the buyer. That exposed wood could have been a broken window, missing roof shingles, or some other repair deemed mandatory by the lender. Know what you are willing/able to invest in regard to repairs and inspect the house properly to ensure you know the big ticket items in advance of the closing. That is true of any home purchase, and not just a short sale.
1 vote
Jane Grant, Agent, Aguanga, CA
Sat Mar 13, 2010
Novella: Yes, a buyer can use FHA financing on a short sale.

How competative is your market. Will your FHA buyer be competing with other buyers?

If your area is competative and there are other offers being submitted on properties then you may want to have your buyer submit a higher Earnest Money Deposit than the typical 1% to make their offer more competative.

Good Luck
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1 vote
Dianne Hicks, Agent, Rancho Bernardo, CA
Sat Mar 13, 2010
Yes you can and I would recommend it. In our area, the market is strong right now. You have a much better chance with FHA or VA on short sales than on REO's. Why.... when I take an offer on a short sale, I am going to take one that is going to stick around. Conventional and cash have a stronger chance at getting a bank owned due easy close and stronger buyer. In addition, they don't mind as much asking for closing cost.

The biggest problem with short sales is getting the buyer to stick around. So convience the listing agent that if they accept your offer, your buyer will stick around and you up your odds of getting in first position. In addition, on short sales... I almost always ask for sellers concessions on short sales where not as easy to do on bank owned.

For these reasons.... I say, a strong Yes. And banks usually do not care on a short sale how you are financing where in general... the picking order for a bank owned is Cash, Conventional, FHA, VA.
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1 vote
Dave Lombardo, Agent, Philadelphia, PA
Fri Mar 12, 2010
Yes, you can use FHA to buy a short sale
1 vote
David A Podg…, Agent, Boynton Beach, FL
Fri Oct 10, 2008
I wouldn't recommend it ... the problem is that the bank has to still approve it. What happens if your pre-approval expires? What happens if their job status changes? What happens if their debt ratio changes (i.e. Xmas shopping)
the bank will definitely not concede closing costs because that simply means more money out of pocket
also FHA appraisals are stricter - any structural issues will throw it out of contention to close... and if the seller is in short sale, how will they come up with money to fix an issue?

There are great deals out there and right now since you can't get a mortgage for more than a borrower can afford, people are chasing short sales because they think they can buy more house that way. If you're looking for a value property - at any price range - just look at a cluster of short sales and find a seller-controlled listing in that community. You may not have the lowEST list price but based on the timing, the ability to negotiate, the ability to have the seller bring the property up, the surity that someone has been paying the electric bill and maintaining the property - these are all reasons why you should reconsider taking an FHA approved buyer to a short sale

until this mess is sorted out, I consider short sales (in my market) to be properties that just won't sell
1 vote
Jo McMillan, Home Buyer, Anderson, IN
Thu Dec 3, 2015
No, there are many steps to be checked first and a short sale doesn't allow for most of the items.
0 votes
Djeanis, Home Buyer, San Francisco, CA
Thu Dec 3, 2015
When purchasing a SS you should be willing to pay for some upfront items BEFORE you enter into the contract. A full and complete inspection should be made with a complete list of all repairs required. Then you need to get contractors involved. Have them again inspect the home and list required repairs (they may find more than an inspector did). They need to give FULL bids of all KNOWN required work, and if they believe that change orders will be made they can include that expected amount in their bids as a separate item from their past experience. If there is a septic system you need to have that inspected as well, and I mean a FULL pump and FULL inspection, not just a pump and look. If you are NOT on city water then have the water system tested fully as well, for condition of the equipment, rate and flow as well as quality. Anything item that will need replaced within 3-7 years needs to be listed and included in repair...anything longer than 7 years you can't include....and the bank will probably want to line out items 3 years and longer.

Take the full market value at current prices. Deduct your cost of inspections, and cost of any bids and repairs, then deduct the amount of the bids themselves. Be sure and include everything from carpet to paint...if it is in bad shape and does not meet standards for Section 8 housing ..the bank can not argue, it must be repaired! The roof included! Deduct an additional 25%-50% of the bids for repairs (depending on how much work is needed, the more work needed the higher the contingency). Remember to deduct any interest, taxes and insurance for the time the property is in rehab. If contractors tell you it will take 8 weeks, allow 12 weeks. At the end of this process you should actually have CREATED EQUITY, not just made a market purchase. You should have value for your work..and time. Make sure to include a fair value for that in the additional 25-50% I mentioned. You will be spending time, believe me! Your time as project manager should be at least 25 per hour...if you are a professional at it then more like 60-90 per hour! You have the right to include your expected equity when through with rehab.

You can get three bids for each trade and average them, if you can't get three bids then instead VERIFY the contractor by his reputation and include the information that his background and ability proves him to be the best choice. If you have more than one bid, and a lower bid is too low or missing something throw it out. There is no such thing as a deal that looks too good to be true. It usually is just that.

All of this means that you should be talking to contractors and becoming familiar with them. Let them know that you are looking at purchasing SS rehab and will be wanting to use them (whether you plan to do the work yourself or not doesn't matter, however if you are getting a construction/purchase loan a contractor will be required!)

In the contract for purchase include addenda with all this information, the costs of rehab and contingencies etc. Include your expected equity for performing the rehab. Let the bank see it all. Be sure and provide a copy of the inspection reports and contractors reports to the seller and the bank. This is FULL disclosure to them. You can even notify them (most states require disclosure of KNOWN deficiencies) that they have now been informed of deficiencies and must disclose them to any future purchaser. This limits the value of the property to any purchaser in the future and all make the seller and the bank want to dispose of the property even faster! Remember these documents are professional inspections and reports...and prove the deficiencies..they must be disclosed to any seller once known. Make sure you include the current owner's name as well as your name on all reports and documents!

If the bank does not want to allow you to gain equity for your work, then you can just tell the bank that you will not work for free to resolve the bank's upside down mortgage. Tell them you expect to be recompensed for the RISK and TIME that you are taking. Very simple. There are websites that can explain how to value the can use their information as well.

Keep RECORDS of all contact, phone calls etc. Make sure your RE agent does the same. EVERYTHING said by the bank and seller, contractor, your agent, the seller agent. every detail! Make sure you have a paper trail to every detail and are copied with every detail from every your email if possible. I have forced a sale by a bank before because they made statements that were properly noted in a timely fashion in a log book. Also, it can be helpful to know the STATE laws regarding banks owning properties. Some states do not allow banks to retain property at all, they must instead dispose of it forthwith. This gives you advantage to begin with. If they foreclose they have to dispose as instantly as possible. I believe TX is one of them.
0 votes
Elhoussine, Home Buyer, Columbus, OH
Wed Dec 2, 2015
yes, in my humble opinion, most of the time, it is not a good fit. Can it work, yes! Absolutely. Will I work with someone who is an FHA buyer and they really love the house and want it? Yes, I am right now and we are awaiting the banks response. However, I make sure the buyer knows the pitfalls that can take place and assure them that I will do my best for them, but try to manage expectations in such a way that they are not devistated if the deal falls through.
0 votes
Halil Can Pa…, Agent,
Wed Dec 2, 2015
Yes he or she can use a fha loan buy a short sale
0 votes
Ddayexpress, Home Buyer, New York, NY
Wed Dec 2, 2015
Waiting for the bank to approve the deal is usually the wait
0 votes
Ddayexpress, Home Buyer, New York, NY
Wed Dec 2, 2015
Yes you can there is no question about it yes
0 votes
Travis, Home Buyer, Gainesville, FL
Wed Dec 2, 2015

Yes you can purchase a short sale with an FHA mortgage but there are some considerations when doing so:

1. Short sales tend to take a touch longer than traditional sales and they create timing issues.

A. Credit reports, income documents, asset documents and other documents need to be constantly updated and can become outdated which means your pre-approval may no longer be valid due to changes in your situation.

B. Your interest rate is typically locked based on a certain time frame for closing. If the short sale takes longer to close than originally believed you could end up with a higher interest rate and/or monthly payments.

Theses are only a couple of concerns and not intended to be all encompassing. Most of these circumstances can be dealt with prior to moving forward with your financing but not always. I have closed many mortgage loans with FHA loans on short sales but they do require patience and significant lender experience.

I hope this helps.

Travis Egan
0 votes
Sam Alsafadi, Agent, Rochester, NY
Sat Nov 28, 2015
Yes you can asee long as you or the,seller is willing to do some necessary repairs your lending facility requires to meet FHA loan standards.
0 votes
Steven Thomas…, Agent, Flagler Beach, FL
Sun Mar 14, 2010
Yes you can! When the short sale package is presented to the short sale lender, a pre-approval letter or proof of funds must be included. The pre-approval letter can be for any type of loan, including FHA.
0 votes
David Van Noy…, Agent, Leawood, KS
Sun Jun 29, 2008
Absolutely, you can use an FHA loan. I would contact Sheila Dees at and tell her your situation
0 votes
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