Short Sale

• When housing prices fall, some homeowners find that their mortgage balances exceed the market value of their homes. For someone who plans to stay in the property this means very little, but it can cause a major problem for someone who wants to sell the home because he can no longer afford the mortgage.
  
  Normally, if you default on your mortgage, your lender forecloses on your home and sells it to raise money to settle your debt. In a short sale, your lender allows you to sell your home for a price below the mortgage balance. Although lenders lose money by agreeing to a short sale, the overall losses are sometimes less than the legal costs involved in a foreclosure.
  
  

FHA Loans

• Many people believe that the Federal Housing Administration provides loans specifically for first time homebuyers. In fact, the FHA does not write loans at all but it does insure loans, which means lenders are protected if the borrower defaults on the loan. Anyone, not just a first time homebuyer, can obtain an FHA loan and use it to buy a short sale. You only have to make a down payment equal to 3.5 percent of the purchase price when you buy a home with an FHA-backed loan, as of 2011. You need to make a down payment of 20 percent with most other loans. These low down payments often attract first time buyers to FHA loans.
  
  

Process

• Short sales have attracted a lot of negative press in recent years because some lenders have taken months to make decisions on short sale offers. However, as of 2010, lenders must accept or reject short sale offers within 10 business days of receiving the bid. Furthermore, lenders cannot require the buyer to close on the home within 45 days of agreeing to the sale. Prior to this rule change, lenders often required people to close on short sales within just a few weeks, which made it difficult if not impossible for first time homebuyers relying on financing to buy these homes.
  
  

Other Considerations

• Many short sale properties are in a state of disrepair because the owners, who are having trouble paying the mortgage, have little or no funds to spend on maintaining the home. Many first time homebuyers use the FHA 203k rehab loan to buy short sales and other properties that need major work. With a 203k loan you can borrow sufficient funds to buy the home and pay for the needed repairs. The total loan cannot exceed the projected after-repair value of the home.