Editor’s note: I first wrote this post in 2011. I’ve completely rewritten it for today’s market and loan rules.
A short sale or bank‑owned home can sometimes cost less than a comparable traditional sale, but it often comes with a longer timeline, less certainty and a property that needs work. From the financing side, those differences matter a lot. As a mortgage advisor serving buyers across Washington State, here’s what I tell clients to understand before they make an offer on a distressed home.
The three main types of distressed homes
- Short sale. The owner sells for less than they owe, and the owner’s lender has to approve the sale price and terms.
- Foreclosure auction. The home is sold at a public sale after foreclosure. These sales are often cash only, with limited chance to inspect the home first.
- Bank‑owned (REO). The home didn’t sell at auction, so the lender owns it and lists it for sale, usually through a real estate agent.
Short sales and bank‑owned homes are the ones most buyers finance with a mortgage, so that’s where I’ll focus.
How financing a distressed home is different
The timeline is typically longer
In a short sale, the seller’s lender has to review and approve the deal, and that can take weeks or even months. Bank‑owned sales may involve several levels of approval too. A longer timeline means your rate lock may expire before closing. Ask your lender up front how long a lock they can offer, what extensions cost, and what happens if the closing date slips. A lock that doesn’t fit the timeline can become an expensive surprise.
The condition of the home affects your loan
Distressed homes are often sold as‑is, and some have been vacant or neglected. Mortgage programs require the home to meet certain condition standards, and the appraisal is where that gets tested. FHA and VA loans have minimum property requirements, and conventional lenders also look at condition. A home with serious problems, such as a failing roof, missing systems or safety hazards, may not qualify for the loan you want until it’s repaired. Utilities that are shut off can also complicate the appraisal and inspections, so ask early.
Vacant homes can also lose appliances, fixtures or landscaping before closing. Do a thorough final walk‑through, and tell your lender if anything changes, because it can affect the appraisal and your loan.
Second liens can complicate a short sale
If the seller has a second mortgage or other lien, that lienholder has to agree to the sale, and sometimes asks for a payment to release the lien. That can delay approval, and any payment must be properly documented. Under today’s rules it should appear on your Closing Disclosure. This is another reason to build extra time into your plan.
Financing the Repairs: Renovation Loans
If the home needs work, a renovation mortgage can roll the purchase and the repairs into one loan, based on the home’s value after the work is done. The two programs I use most are:
- FHA 203(k). A government‑backed renovation loan for primary residences, with a down payment as low as 3.5% for qualifying buyers.
- Conventional renovation loans. Fannie Mae HomeStyle® and Freddie Mac CHOICERenovation® also finance repairs and improvements in a single loan.
Renovation loans have their own requirements, such as contractor bids, an approved scope of work and funds released as work is completed, so they take planning. They can make a rough home financeable when a standard loan wouldn’t.
Read: Renovation Mortgage Programs for Washington State
Is the discount worth the trade‑offs?
It depends on your numbers. A lower price may be offset by repair costs, a longer wait, and the extra cash you may need for reserves and a larger down payment. Before you decide, look at the total cost: purchase price, repairs, carrying costs while you wait, and the financing you’ll need. Distressed homes also sometimes draw multiple offers, so a lower list price doesn’t guarantee a lower final price.
Patient buyers with a realistic budget and a flexible timeline often do well. Buyers who need to close quickly or can’t absorb surprises usually do better with a traditional sale.
If you’ve had a short sale or foreclosure yourself
Some buyers considering a distressed home are returning to the market after their own short sale or foreclosure. Standard loan programs have wait periods that apply, and alternative options, like non‑QM loans, may help in some cases.
Read: When Can I Buy Again After a Short Sale? and Non‑QM Mortgages in Washington State
How to get ready before you make an offer
- Get a full pre‑approval before you shop, so you know your price range and which loan programs fit.
- Tell your lender the property is a short sale or bank‑owned as soon as you’re interested, so we can plan the rate lock and timeline.
- Decide whether you’ll need renovation financing, and if so, start gathering contractor bids early.
- Keep cash reserves available for repairs, a longer timeline and unexpected costs.
Read: Mortgage Tools and Resources
Frequently asked questions
Can I get a mortgage to buy a short sale or bank‑owned home?
Yes. Most buyers finance short sales and bank‑owned homes with a conventional, FHA or VA loan, as long as the home meets the loan program’s condition requirements. Foreclosure auctions are different and are often cash only.
Why does a short sale take so long to close?
The seller’s lender has to review and approve the sale, and if there’s a second lien, that lienholder may also need to agree. That can add weeks or months, so plan your rate lock and timeline carefully.
What if the home needs repairs and won’t qualify for my loan?
A renovation loan, such as an FHA 203(k) or a conventional HomeStyle or CHOICERenovation loan, can finance the purchase and the repairs together. It’s worth discussing this with a lender before you make an offer.
Does a rate lock cover a long short sale closing?
Not automatically. Rate locks have an expiration date, and extensions usually cost money. Ask your lender how long a lock they can offer and what an extension costs before you commit to a short sale.
Can I buy a distressed home if I had a short sale or foreclosure myself?
Possibly. Standard loan programs have wait periods after a short sale or foreclosure, and some non‑QM loans may be more flexible. The right option depends on your credit history and timeline.
Let’s build your game plan
If you’re considering a short sale or bank‑owned home anywhere in Washington State, I’m happy to look at your numbers, talk through loan options and help you plan a timeline that works. Let’s talk through your options.
Last reviewed: October 2026
About Rhonda Porter
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