A normal property transaction may appear simple -- a buyer uses a mortgage to purchase a property at an agreed upon price, using the property as collateral for the loan. The buyer makes a high enough down payment to qualify for a loan, and the seller agrees on terms for the payment he will receive from the mortgage when he sells. Deadlines are set by both the lender creating the mortgage and the title company in charge of the transaction, and the buyer receives the title to the property. However, there are many different types of loans and real estate sales, especially in the post-crash housing market. An FHA loan and short sale are two of these different types, but fortunately they can work well together.
FHA stands for federal housing administration. The FHA loan program was designed decades ago to help people purchase houses. It offers reasonable interest rates and a very low down payment requirement, no more than 3 percent of the purchase price required. In booming times when the real estate market is fast-paced and loans are easy to get, there may not be much reason to use an FHA loan. But when the real estate market is struggling and loans are difficult to get, FHA mortgages can be one of the most effective methods for purchasing a property.
A short sale occurs as a compromise between a seller and her own lender. A seller who cannot make payments must face foreclosure or an alternative change in the loan. In a short sale, the seller agrees to sell the house with supervision from the lender, using the funds to pay back her own mortgage instead of being foreclosed on. This means that the lender is in charge of approving a buyer's offer or making a counteroffer, which can take a long time compared to other house sales. However, there is little preventing a buyer from using an FHA loan to purchase a short sale house.
FHA loans do have their own unique requirements that buyers must meet if they want to use the loan to purchase a property. A down payment is required, even if it is only 3 percent. FHA loans also require mortgage insurance, a type of policy that pays the loan when the borrower cannot make payments and adds a fee each month to loan payments. The seller's lender may also want loan preapproval or prequalification before it considers an offer. It will often refuse to pay any costs associated with the buyer's loan or offer.
In a property transaction, time is often important. The FHA loan, for instance, will have a deadline after which the lender will no longer offer the loan, and the application may be renewed. The short sale lender, on the other hand, will often take months to arrive at a decision, which means buyers cannot actually apply for the FHA loan until the seller's lender approves the sale, after which they have the lender's deadline, typically a month, in which to qualify for and receive the FHA loan. This battle of deadlines can put the buyer under difficult time constraints.
- MortgageLoanPlace: Comprehensive FHA Loan Guide
- Consumer Financial Protection Bureau. "What Is "Seller Financing"?" Accessed July 9, 2020.
- Internal Revenue Service. "Special Information Relating to Purchase Money Mortgages, Purchase Money Security Interests, and Subordination of the Federal Tax Lien." Accessed July 9, 2020.
- Cornell Law School Legal Information Institute. "Purchase Money Mortgage." Accessed July 9, 2020.
- Hud.gov. "Let FHA Loans Help You." Accessed Feb 25, 2020.
- Office of the Comptroller of the Currency. "FHA’s 203(b) Purchase Money Loan Guarantee Program." Accessed July 9, 2020.
- U.S. Department of Veterans Affairs. "Purchase Loans." Accessed July 9, 2020.
Tyler Lacoma has worked as a writer and editor for several years after graduating from George Fox University with a degree in business management and writing/literature. He works on business and technology topics for clients such as Obsessable, EBSCO, Drop.io, The TAC Group, Anaxos, Dynamic Page Solutions and others, specializing in ecology, marketing and modern trends.