Jeff’s Carlsbad Blog for First Time Home Buyers


Avoiding a Short Sale

Posted in Due Diligence,Financial,Mortgage info by Jeff Dowler on January 15, 2007

This is NOT a suggestion that you not consider a short sale property for purchase. I think many of them can be a good deal for you, if you do your due diligence, the home is right for you, and it fits your budget.

This is about avoiding getting yourself into a short sale situation. This can happen fairly easily. If you purchase a home with 100% financing, there is no equity in the home. Your mortgage balance IS the purchase price. Over time, you will build up equity, especially if the value appreicates. But this can take a while, especially since most of your payment will be interest, not principal, especially in the first few years.

The bigger issue is the interest only mortgage. This is often offered as a way to get buyers into a home with the lowest payment, especially in a high-priced area. The risk is that you ARE NOT paying down the mortage balance, unless you make optional payments over time. And usually people who get into these types of loans are not in a good position to make additional payments.

The problem arises if you need to sell (especially within a couple of years, perhaps). Given the typical home incurs about a 7-8% cost to sell (commissions and closing costs) you can find yourself in a short sale situation (i.e., owing more than the house is worth) unless appreciation is significant (i.e., more than 7-8% in the time you are there).

Be careful when looking into loans and deciding what program to use, and what you can afford. Short sales are bad for your credit!

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