Financing TipsHow to Finance a Short Sale Property Purchase by Yassine Ugazu October 6, 2019October 2, 2019 by Yassine Ugazu October 6, 2019October 2, 2019Financing is an integral part of real estate investing. In fact, very few real estate investors have the necessary funds to take on investment projects without outside financing. And even those who do are more likely to opt for mortgages at competitive rates rather than dip into their savings. Real estate investment financing is available for a wide array of properties. This includes short sale properties. In this article, we will define what these properties are and explore your short sale financing options when buying a short sale property.What Is a Short Sale Property? The concept of a short sale in real estate is often conflated with foreclosures. The two concepts are actually quite different. A short sale occurs when a distressed homeowner puts the property up for sale in order to avoid foreclosure. Consequently, the prices of these investment properties tend to be lower than the amount that the homeowner owes. From a real estate investor’s perspective, buying short sale properties can be extremely profitable.It is worth noting that real estate investors are not the only party that benefits from short sale investment property. Thanks to a short sale, homeowners will be able to avoid the negative impact that a foreclosure would have on their credit score. As for the banks, it helps them avoid the expenditures that come with the foreclosure process. At the end of the day, banks aren’t in the business of owning and managing investment properties. A short shale property deal saves them both time and money and allows them to focus on their core business.The Main Steps of a Short SaleA short sale is a process that the homeowner initiates. Here are its main steps.1- The seller submits a short sale package to the lenderThe initial step is submitting a short sale package to the bank. This includes documents such as the seller’s hardship letter, latest bank statements, tax returns, and an authorization letter. The type of the package will vary depending on whether the property is owner-occupied or non-owner occupied. Banks tend to be extremely cautious when analyzing these packages and they often reject the initial sales price. This is the reason why many sellers hire a real estate agent to arrange the package for them.2- The buyer makes an offerOnce the lender approves the package, the seller can accept short sale offers from investors. The bank will be heavily involved in this step. In fact, the listing agent will have to send all the relevant documents to the bank as soon as the two parties reach a deal. This consists of a fully executed listing agreement and purchase contract as well as the buyer’s preapproval letter.Related: Short Sale Listings: Where Investors Can Find Them3- The bank processes the transaction A short sale property deal concludes when the bank finishes processing the transaction. Due to the sheer amount of paperwork and the thorough analysis that the bank has to conduct, this can take several months.Now that you’re familiar with how a short sale property deal works, let’s delve into your financing options when buying short sale investment property.How Can You Finance a Short Sale?Financing real estate investments can be done through various methods. Below is a detailed overview of the options for financing a short sale property.1- Buying a short sale with cashBefore considering short sale loans, the most basic financing option for any real estate investment is to use your own funds. Some investors prefer this option due to its overall simplicity and convenience. Applying for an investment property mortgage can be a tedious process, and real estate investors with sufficient funds might want to avoid it altogether. Having said that, buying short sale property with cash does have some drawbacks. Such an investment can lead to a loss of liquidity. Moreover, buying an income property with cash does not come with the same tax deductions as a mortgage loan.2- Buying a short sale with an FHA loanAn FHA loan is a mortgage that is issued by the Federal Housing Administration. On top of being insured by a federal entity, FHA loans require low down payments and have lax credit criteria. So can you buy a short sale with an FHA loan? The answer is yes. Using an FHA loan to buy a short sale property is possible as long as you get prequalified by the lender. Also, FHA loans are typically intended for owner-occupied properties. You will likely have to live in the investment property for a set period of time. This can still be profitable if you look for a multi family home. More importantly, the lending entity itself has to get the approval of the Department of Housing and Urban Development.Related: Can You Use FHA Loan for Investment Property Financing?3- Buying a short sale with a VA loanThis financing option is only available to American veterans, military members currently serving, and select surviving spouses. VA loans are guaranteed by the United States Department of Veterans Affairs and are mostly used to purchase residential real estate properties. If you happen to be part of the above demographic, can you buy a short sale with a VA loan? You absolutely can! However, finalizing the transaction requires strict adherence to VA guidelines. This is why it’s advisable to retain the services of a real estate agent that has some experience in VA loans and short sales.4- Private financing Private financing is always an option worth considering. If you do it correctly, obtaining loans from private sources such as family and friends or other investors can be a profitable alternative to professional lenders. As long as you present a coherent real estate investment strategy, there is a good chance of obtaining generous loan terms and very low interest rates.5- Portfolio lendersThese are institutions that use their own funds to provide loans. They also keep these loans on their books rather than sell them on the secondary market. Moreover, portfolio lenders are not constrained by federal guidelines. This enables them to be more flexible than conventional lenders. Thanks to this, real estate investors looking to buy short sale properly might be able to negotiate highly favorable terms.Related: 6 Types of Loans for Investment Properties in Real Estate The Bottom LineAs you can see, financing a short sale property deal can be quite simple and accessible. Take the time to learn every aspect of these sales and explore every financing option before making a decision. In the meantime, you can start looking for short sale properties right now on Mashvisor! Head over to the Mashvisor Property Marketplace to check out hundreds of short sale listings.To start your 14-day free trial with Mashvisor and subscribe to our services with a 20% discount after, click here. Start Your Investment Property Search! START FREE TRIAL Cash BuyersFHA LoanPrivate Money LendersShort Sale 0FacebookTwitterGoogle +PinterestLinkedin Yassine UgazuYassine is a versatile content writer who enjoys crafting compelling copies and articles about the various facets of real estate. 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