Can You Buy a Short Sale With a Conventional Loan?

Purchasing a home can involve various transaction types, and a short sale is one option that often raises questions about financing. A short sale occurs when a property is sold for less than the outstanding mortgage balance owed by the homeowner, requiring the existing lender’s approval. For many prospective buyers, a conventional loan represents a common and flexible financing pathway. It is possible to use a conventional loan to purchase a short sale property, though the process involves specific considerations and steps that differ from a traditional home purchase.

Understanding Short Sales and Conventional Loans

A short sale occurs when a property is sold for less than the total amount the homeowner owes on their mortgage. This transaction requires the approval of the seller’s mortgage lender, who must agree to accept a payoff amount “short” of the full debt. From a buyer’s perspective, the property is being sold by a financially distressed homeowner. All sale proceeds go directly to the seller’s lender.

Conventional loans are mortgage loans that are not insured or guaranteed by a government agency, such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). These loans are widely available through private lenders like banks, credit unions, and mortgage companies, making them a popular choice for many homebuyers. Conventional loans typically feature competitive interest rates and terms, often requiring a minimum credit score of around 620 and a down payment that can be as low as 3% for some programs.

Conventional loans are compatible with short sales due to their flexible underwriting standards compared to some government-backed loans. Unlike FHA or VA loans, conventional loans do not impose extensive property repair mandates before closing, which is advantageous for properties sold “as-is” in a short sale. The seller’s lender approval is the primary hurdle, not the conventional loan itself.

Key Considerations for Buyers

Buyers of short sale properties using conventional loans must understand several factors. The property’s condition and its ability to meet conventional loan appraisal requirements are important. While conventional loans have lenient property standards, the home must be deemed “safe, sound, and structurally secure” by the appraiser. Properties with major structural defects, significant damage, or safety hazards may not qualify for conventional financing unless repairs are made, which is rare in an “as-is” short sale. Therefore, a thorough home inspection is advisable to identify potential issues.

The seller’s lender approval process is an important and often lengthy phase. After a buyer’s offer is accepted by the seller, it must be submitted to the seller’s mortgage lender for review and approval. This review involves the lender obtaining their own property valuation, such as an appraisal or a Broker Price Opinion (BPO), to determine if the proposed sale price is acceptable. This stage can take several weeks to several months. Buyers should be patient during this period, as the lender has no legal obligation to approve the short sale, and delays are common.

For their conventional loan, buyers need to provide financial documentation to their lender for pre-approval and full underwriting. Requirements include recent pay stubs, W-2 forms for the past two years, and tax returns for the last two years. Lenders also request bank statements for the most recent two to three months to verify assets and funds for a down payment and closing costs. Demonstrating stable income, sufficient assets, and a favorable credit history is important for securing conventional loan approval.

Navigating the Short Sale Purchase Process

The purchase of a short sale property begins with submitting an offer, similar to a traditional sale but with an added layer of approval. The buyer’s real estate agent prepares the offer, which is presented to the seller. Once accepted, it is forwarded to the seller’s mortgage lender, along with a short sale package including financial hardship documentation from the seller and the buyer’s pre-approval letter and proof of funds. The seller’s lender is not a direct party to the initial offer negotiation but approves or rejects the terms.

Upon receiving the offer and the complete short sale package, the seller’s lender initiates a review process. This involves verifying the seller’s financial hardship and ordering their own valuation, such as a Broker Price Opinion or appraisal, to assess the property’s market value. The lender then analyzes the offer against their valuation and may accept it, reject it, or issue a counter-offer with revised terms or a higher acceptable price. This negotiation phase can be protracted, and multiple rounds of communication may occur before an agreement is reached.

Concurrently with the seller’s lender review, the buyer’s conventional loan underwriting process proceeds. Once the short sale is approved by the seller’s lender, the buyer’s own lender orders an independent appraisal of the property to ensure it meets lending guidelines and justifies the loan amount. The property must satisfy basic conventional loan condition requirements, such as being safe, sound, and structurally secure, for the buyer’s loan to be finalized. The buyer’s lender also completes their underwriting review, scrutinizing the buyer’s income, assets, and credit history to issue final loan approval.

The final stage is closing the short sale, which occurs once the seller’s lender has approved the short sale terms and the buyer’s conventional loan has received underwriting approval. The closing process then proceeds much like a standard real estate transaction, involving the signing of all necessary loan and transfer documents. Proceeds from the sale are disbursed to the seller’s lender, satisfying the agreed-upon short payoff. While the approval process can be lengthy, once all approvals are in place, the closing moves forward within a standard timeframe, often around 30 to 45 days.