We are seeing something I did not expect to see for a long time: Short Sales!
A lot of them, in fact, are often in California too – where the market is holding up much better overall (CA’s short sales though are all condos).
95% of my blog readers are agents who know what short sales are, but I’ll review very quickly for the non-agents.
I will then offer my one big warning!
A short sale is when a homeowner sells their home for less than they owe on their mortgage (or mortgages if there is more than one mortgage).
Homeowners must “apply” for the short sale by reaching out to their lender(s). Upon approval, they list their home. Then when they get offers, they must get another approval from their lender.
Here’s the warning: The process never goes anywhere nearly as quickly as anyone expects. Ever.
As a result, our buyers (buying the short-selling property) end up locking in their interest rate too soon, and they invariably see their lock expire.
Our buyers lock in their rate upon assurances that the short sale approval and paperwork will be done by a certain date, but that certain date is never certain.
Hence, we recommend not locking until all the approvals and paperwork are done.
What Happens if a Rate Lock Expires?
As a reminder, rate locks are for set periods of time, e.g., 15, 30, 45, or 60 days.
If a transaction is not closed before that set period of time, the lock expires.
When a lock expires, borrowers have three options:
- Pay to extend the lock.*
- Re-lock their rate with “worst case pricing.”**
- Wait 30 days, and re-lock at the market rate.***
*Paying to extend the lock is very cheap if it is only a day or two, e.g., 0.02% of the loan amount per day. But that can add up quickly and get expensive if lock extensions exceed a week (usually the case with short sales). There are also limits to how long someone can extend a lock. I should also note that different lenders and investors have different lock extension policies.
**Re-locking with “worst case” pricing means that borrowers can just lock their rate in again, but they will have to take whatever rate is worse: the rate they initially locked in, or the current market rate. Hence, if rates improved since borrowers originally locked, borrowers will not be able to take advantage of that improvement by re-locking; they will be stuck with their original rate. But – at least they can re-lock at no cost.
Sidebar: What about “rate roll-downs?” Most lenders, including JVM, offer rate roll-downs, meaning that borrowers can roll down their interest rates if rates improve. BUT – for a roll-down to work, rates have to improve significantly (over ¼%), and there are fees involved, so even the best “roll-down” options do not allow borrowers to “roll down” to current market rates. Best case is about 2/3 of the way to current market.
Sidebar II: If a rate lock expires because of a lender-caused delay, we, of course, pay for the lock extension. If anyone has a lender that doesn’t, they need a new lender…
***If borrowers wait 30 days from the date of their lock expiration, it is like they never locked at all – meaning they can just lock at “current market rates” (which will hopefully be better).
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