Buying a foreclosure vs short sale home

If you're in the market for a house but looking for ways to save on this major purchase, you may be considering buying a foreclosure or a short sale. Navigating the short sale process as well as the foreclosure process can be somewhat tricky due to the paperwork involved. Because the home's current owner is in a tough financial situation, there will be extra steps in the mortgage process. But, if you work with a real estate agent experienced in these types of transactions, buying one of these properties can represent substantial savings. Learn the differences when purchasing a short sale vs. a foreclosure so you can be prepared to navigate the process.

The short sale process begins when the current owner recognizes he or she will be unable to pay off the loan in full. The owner then negotiates with his or her lender to accept a lower price for the home. This is a state called pre-foreclosure. You can start looking for homes in pre-foreclosure online, in public records or by working with a real estate agent who is experienced in the short sale process.

Be sure you tour the available properties just as you would if you were buying a home that was not a short sale. At this time, you'll also want to get your mortgage pre-approval in order so that you're ready to submit an offer when you find a property you're interested in purchasing.

Once the owner accepts your offer, the lender needs to see proof of financial hardship from the current owner to agree to a short sale. The seller will submit what's known as a hardship letter that outlines all of his or her finances to support the claim that he or she can't afford to pay the difference between your offer and the full value of the home. The lender will also want to see bank statements and other documents supporting this claim.

If the lender agrees to proceed with the short sale process, you'll complete the lender's paperwork, proving that you have your financing in order, the earnest money on hand and a down payment. You may need more earnest money or a larger down payment for a short sale than you would for a non-short sale. (Since the current owner turned out to be a credit risk, the lender will look for a buyer with much less risk.)

Then, you'll have to wait for all of this paperwork to get processed. Typically, short sales take several months to close. Compare this to the traditional process, where you can close in one or two months. Some lenders may have short sale committees or at least many internal steps. So, be patient and regularly check in on the process to be sure things are proceeding smoothly.

The foreclosure process on a home is triggered when a borrower actually defaults on the loan, meaning the borrower stops paying his or her monthly mortgage bill. By comparison, short sales happen just prior to that point. Generally speaking, the foreclosure process begins three to six months after the first missed mortgage payment. Once the home goes into foreclosure, the property is put up for auction by the lender.

Typically, the current lender will buy the property at auction and then put it up for sale as-is. At this point, the home is known as a real estate owned property, or REO. To find a foreclosed property, ask the lender for a list of REO properties. Buying the home directly from the auction isn't usually advisable for a couple reasons. For one thing, amateur buyers tend to overbid because they aren't familiar with the auction process. Secondly, the home's current owner is probably still living there, and eviction proceedings will have to start.

That's why it's best to work through the lender's list of REO properties. When you find one you're interested in purchasing, work through the lender to submit a mortgage application. Remember that because these properties are sold as-is, you should be prepared to deal with things in the home that will not be repaired or updated prior to your purchase.

Navigating the foreclosure or short sale process can be a daunting task for the amateur. While all the information is public, tracking it down between lenders, court records, and agents can be a lot of work. Additionally, it's very important that you adhere to deadlines and follow up diligently on paperwork. Missing a step could impede your application.

You should use an experienced agent to not only help you manage the process but also provide guidance. For example, in the early stages, he or she can advise you on putting in an offer that is reasonable. Be warned that bidding on these homes can be competitive.

The process of buying a short sale or foreclosed home is unique every time, so you'll probably have plenty of questions. Be sure to work closely with a Citizens Bank home loan advisor so you understand the process every step of the way. Just call 1-888-514-2300 to get started, or learn more about various Citizens mortgage options.