A short sale is a sales transaction for which the seller’s mortgage lender voluntarily agrees to accept a loan payoff of less than the balance owed. A short sale may or may not involve a property in foreclosure. However, a short sale is often considered as an option for avoiding foreclosure.
To illustrate the concept of a short sale, let’s say Mary Homeowner owes $400,000 on a mortgage loan, but the fair market value of her property is only $300,000. Mary’s loan is what is commonly referred to as “upside down” or under-secured. She has no equity in her property. She is unlikely to be able to re-finance her loan because the house won’t appraise high enough. She can sell the property for $300,000 if she pays out of pocket for the $100,000 shortfall plus closing costs. This situation is generally not considered a short sale.
In a successful short sale, the upside-down homeowner is unable or unwilling to pay for the shortfall and closing costs, but sells the property by convincing the homeowner’s lender to accept a loan payoff of less than what’s owed to the lender. In the above example, even if Mary Homeowner owes $400,000 to her lender, she can sell her home for $300,000 without paying any out-of-pocket costs if her lender agrees to a loan payoff of $300,000 less closing costs.
In attempting to do a short sale, a homeowner and his or her agent generally find a buyer for the property and then submit a short sale package to the homeowner’s lender for approval. Lenders are not obligated to respond to or approve short sale requests. In recent years, lenders have taken a long time to process short sale requests, and they have rejected many. Yet the lure of the short sale persists, because if it succeeds, everyone wins – the seller gets out of a predicament, the buyer gets a property for a good price, and the lender and the community avoid the problems of foreclosure.
Completing a short sale can be a huge effort for both the homeowner and the agent. Even if it succeeds, it may have unintended consequences for the homeowner. Homeowners should thoroughly examine the financial, legal and tax consequences of a short sale under their individual circumstances. A homeowner considering a short sale should consult with an accountant, attorney, qualified credit counselor, or other appropriate professional regarding their particular circumstances. Alternatives to a short sale include: maintaining the status quo, a loan workout or modification, refinancing, deed in lieu of foreclosure or bankruptcy.
Although all lenders have different requirements and may demand that a borrower submit a wide array of documentation, the following steps will give you a pretty good idea of what to expect in the short sale process:
Call the Lender You may need to make a half dozen phone calls before you find the person responsible for handling short sales. You do not want to talk to the “real estate short sale” or “work out” department, you want the supervisor’s name, the name of the individual capable of making a decision.
Submit Letter of Authorization Lenders typically do not want to disclose any of your personal information without written authorization to do so. If you are working with a real estate agent, closing agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to talk with those specific interested parties about your loan. Alternatively, your real estate agent can provide you an “Authorization to Receive and Convey Information” (ARC) form. The letter or form will need to include the following: property address, loan reference number, your name and signature, date, your agent’s name and contact information.
Preliminary Net Sheet When you’ve reached the appropriate lender contact and you’ve successfully submitted your ARC form to them, they will enter your information into the system as a potential short sale. They will then prepare (or have a title company prepare) an estimated closing statement that shows the projected sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. If the bottom line shows cash to the seller, you will probably not need a short sale.
Hardship Letter Your lender will require documentation of the reasons you need to do a short sale, so you’ll need to prepare a hardship letter. The sadder, the better. This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized or a truck ran over your entire family, but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.
Proof of Income and Assets It is best to be truthful and honest about your financial situation and disclose all assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving.
Copies of Bank Statements If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it’s probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
Comparative Market Analysis Sometimes markets decline and property values fall. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show prices of similar homes:
Purchase Agreement & Listing Agreement When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement. Be prepared for the lender to renegotiate commissions and to refuse to pay for certain items such as home protection plans or termite inspections.
Now, if everything goes well, the lender will approve your short sale. As part of the negotiation, you might ask that the lender not report adverse credit to the credit reporting agencies, but realize that the lender is under no obligation to accommodate this request. Credit report status is not always negotiable. The steps required above often take 4 – 6 months to complete, so all parties involved need to be prepared to be patient. In many cases, the first buyer will fall out in a short sale transaction, and it will take another 1 – 2 qualified parties to get the deal closed. Your real estate professional can advise you each step of the way and help you successfully close your short sale.