Important Factors To Consider When Getting Financing On A Foreclosure, Short Sale or New Construction

Short sales, foreclosures and new construction homes all have caveats that need to be considered when pursuing financing.

If the guidelines and potential pitfalls are not properly understood, you could face delays in closing or potentially even a denied loan.

Short Sales & Foreclosures -

Short sales and foreclosures are everywhere. They often represent great value when looking to by a new home.

However, they also present a unique set of problems that homebuyers need to be aware of and plan for.

1.) Property Condition

Typically, when homeowners are facing foreclosure or looking to short sell their house, it means they lack the financial means to pay the mortgage or maintain the property.

A property in poor health can cause many financing issues for traditional financing.  FHA loans have specific rules requiring that the property is move-in-ready, unless you’re using a 203(k) Rehab Loan.

2.) Timing Challenges

Short sales typically come with awkward timeframes for purchase contract approval and loan closing.

Each bank is different, but approval can take anywhere between a week to 120 days.  As a general rule, the larger the bank the longer it takes to get short sale approval.

The lack of a set timeframe for short sale approval makes the timing of loan submission, rate locks and closing very challenging. You have your approval conditions cleared to close on time, just to find out that new appraisals, income, employment and asset verifications need to be updated by an underwriter to cover the most recent 30 days. Worst case, purchase contracts and legal documents may have to be re-submitted to a bank for an updated approval.

Either way, be prepared for a lot of redundant paperwork when purchasing a short sale property.

New Construction -

Home buyers looking to purchase new construction using FHA financing will have more hoops to jump through than those purchasing through conventional (Fannie Mae / Freddie Mac) financing.

If you want to use FHA financing to purchase new construction then you need to be aware of a number of issues that can trip you up.

First, you MUST have a certificate of occupancy (C.O.) certifying that the property is complete and move-in-ready. If you do not have this then you typically CANNOT go FHA. You’ll need a renovation loan, but a FHA 203K WILL NOT work.

You’ll need to employ the Fannie Mae HomeStyle for a property without a C.O.

In addition to the C.O. you’ll need some combination of the following documents as dictated by your lender and your unique situation:

  • Builder’s Certification
  • One Year Builder Warranty (10 YR Warranty may be required)
  • Termite Inspection (when applicable)
  • Septic Inspection (when applicable)
  • Well Test (when applicable)
  • Construction Permits

There are a number of factors which go into exactly what combination of documentation will be required to satisfy your lender and FHA, so it is best to work with an experienced loan officer when purchasing new construction with FHA financing.

If you plan on using conventional Fannie Mae / Freddie Mac financing you’ll still have hoops to jump through, just not as many as FHA. You’ll also have a higher down payment requirement and the credit qualification guidelines tend to be stricter.

Whether it be FHA financing, conventional financing or renovation financing, it’s important to have a qualified home buying team in place that can lead you through the maze of paperwork and negotiations.


Related Articles – Home Buying Process:

March 28, 2010 by · Leave a Comment

Related Posts

About Allen

Allen is President and Founder of First Trust Mortgage, a family owned, 15 year old, mortgage planning firm in Fort Lauderdale, Florida. First Trust Mortgage was founded in 1996 and provides residential mortgages in Florida. Allen's vision for First Trust Mortgage was based on two principles. First was to help his clients make informed decisions regarding residential mortgages. Second was to build long lasting relationships with his clients and referral partners. Over the past 5 years Allen has concentrated his education and efforts in the area of managing Real Estate equity through mortgage planning. Allen was one of the first certified mortgage planning specialists in the State of Florida and is a regular guest of Steve Pomegranate's "On The Money" radio program on NPR and Ray West's "Talk About Money" radio program on WAFG. Allen also teaches continuing education classes to certified financial planners and insurance professionals around the subject of managing equity in real estate. Allen graduated from the Pennsylvania State University in 1983. Allen has been lending in Florida since 1985 when he joined Great Western Bank (Washington Mutual) managing the company's Florida Commercial Real Estate Mortgage operation. In 1996 /1997 Great Western Bank was sold to Washington Mutual and Allen formed First Trust Mortgage Corporation. In 2003 Allen focused his practice on Strategic Real Estate Equity Management and is considered to be an expert on that topic. Allen practices personally the concepts he shares with the clients, peers and financial service providers. Allen exclusively participates in the residential mortgage industry and has purposely chosen to hold no other licenses even though he has participated and passed the class requirement for the Florida Real Estate Commission, Florida Mortgage Broker, Health, Life & Variable annuities license. Specialties Helping Consumers, Realtors and Financial Service Professionals Keep Current On Mortgage Trends and Provide Mortgage Solutions As Needed. In Addition I Love To Educate Seniors On The Use of Reverse Mortgages and First Time Homebuyers On How Much Payment Is Enough.

Leave a Comment