Short Sale FAQs

Should I buy short sales?

A short sale is where the lender is willing to accept less than what is owed on the loan to allow a sale of the property to occur. In most transactions, the loan to the lender must be paid off for the sale to occur. So, when you’re doing Nomad should you consider buying a short sale? My advice… don’t focus on them.

If while looking for a Nomad property you happen to come across one that is a short sale and it would be a good Nomad property, then I would not automatically discourage you buying it just because it is a short sale.

However, I would definitely not encourage you to specifically seek out short sales to buy.

In fact, in our local market in Northern Colorado… the number of shorts sales is currently almost non-existent. So, we do not focus on buying them at all.

I would encourage you to rely on the advice of your local real estate agent on a case-by-case basis when considering buying a short sale as a Nomad property.

One additional important note on short sales… they can take a lot longer to close than traditional transactions as you wait to get approval from the lender to accept the short sale. That can make it very difficult to put a tenant if your previous property and purchase the short sale. So, definitely take that into consideration as well.

Can I do Nomad with a short sale?

It is not unusual for a Catch Up Nomad to find themselves as a Catch Up Nomad partially because they’ve had some financial challenges in the past. These challenges often involve a short sale where they sold a property and had the bank accept less than what was owed as payment to have the sale go through.

So, once you have a short sale, does that mean you can’t do Nomad anymore? No, you can still do Nomad even if you’ve had a short sale in the past.

There are a couple variables on how long you’ll need to wait to be able to get a new FHA loan after you’ve had a short sale. In some cases, you may not need to wait at all.

For example, if you were not in default at the time you filed for a short sale and you had been current with all on-time payments for mortgages and other installment debt for at least 12 months leading up to the short sale… then there is no waiting period at all and you can get an FHA immediately.

On the other hand, if you were in default (behind on payments) there may be a three year waiting period for getting an FHA loan. The 3 year waiting period begins on the date of the short sale or if it was an FHA-insured loan then it becomes the date FHA paid the claim on the short sale.

There are some additional exceptions to the three year waiting period if you can show extenuating circumstances that caused the default. For example, if there was a serious illness or death in the family of the primary income earner, a divorce in very limited situations or job loss.

I think it goes without saying that you need to show you had good credit prior to the short sale and have good credit now. You’ll need to qualify for the new loan.

The waiting period for conventional financing after a short varies with the amount of down payment. So, to get additional Nomad properties with minimal amounts down, you’ll likely need to wait up to 7 years. If you’re willing to put more down, the time frame you need to wait shortens considerably down to 2 years if you’re willing to put 20% down.

In a future article, I’ll need to write out a modified Nomad model for those with short sales, bankruptcies or foreclosures but there are some creative things we can do that will still follow the lender guidelines.

REO FAQs

Should I buy REOs?

REOs or Real Estate Owned by the bank or the lender are usually properties where the bank has foreclosed on them. So, should you consider buying these REO properties when doing the Nomad model?

My opinion is that if they would otherwise make a great Nomad property I would not rule them out. If you happen to find a great REO and you want to buy it, move in, live there for a year then convert it to a rental… that’s fine and approved by me.

However… I would strongly warn you… especially if you happen to be in a real estate market as hot as ours… that you do not wait around and focus on finding an REO to buy. The raw, very small number of REO properties available for sale will limit the number of properties you have to choose from and I’d rather see you buy a property that would be an ideal Nomad property. Do not wait for an REO specifically.

You may also want to read more about my thoughts on whether you want to focus on buying at a discount when doing Nomad. That is why I think many buyers want to look at REOs, short sales and foreclosures to begin with. I’ll give you the short version of my opinion on buying at a discount: it is not required, but can help the Nomad model in certain specific situations.

Rent FAQs

Can I use the rental income from Nomad houses to qualify for me next Nomad home?

Yes! If you’ve got positive cash flow from previous Nomad houses that you’ve purchased you can use that extra cash flow as income to help qualify you for your next Nomad purchase.

Many (although not all) lenders will allow you to use a signed lease as income that can be used to offset the loan expenses on loans. There are restrictions and limitations to this like whether or not you have landlording experience that may come into consideration with the loan underwriter. Check with your lender early about this.

However, it is important to point out that the opposite is also true… if you have negative cash flow on a property, it will not help you qualify for the next purchase. Having negative cash flow will hurt your ability to purchase the next property.

Some Nomads have more than enough income to qualify even with this negative cash flow or without using a lease from the property you’re moving out of, but some do not.

You can talk to your lender to get a much better idea on how this applies to your specific situation or, as a quick and easy way to get a rough idea that is not specific to you, you can also plug some numbers into the Nomad Calculator Classic and look at the income required… that does take into account rent from the previous Nomad properties.