While it is a stressful decision for many families, a short sale may be the best solution, short of foreclosure, for homeowners who owe more on their properties than they are worth. Technically, a homeowner is 'short' when the outstanding loan is more than the current market value of the property. A short sale occurs when the homeowner finds a willing buyer and then negotiates with the lender to accept less than the full balance of the loan at closing (typically to avoid foreclosure). Once the buyer closes on the property, the property is considered 'sold short' of the total value of the loan. The procedure requires stamina but it can yield favorable results for all. Organization and full disclosure will also help you manage through the process.
In the past it was rare for lenders to accept short sale proposals. With overwhelming market shifts, and changes in corporate policy, lenders have become much more willing to work with homeowners in distress, and since a short sale generally costs the lender less than a foreclosure, it can also be a way for the lender to reduce their losses.
To qualify for a short sale, homeowners must prove all of the following circumstances:
- Financial Hardship. A situation is causing the borrower to have trouble affording their mortgage.
- Monthly Income Shortfall. Basically the borrower has more expenses than income, which will, or already is, preventing them from affording their mortgage.
- Insolvency. The borrower does not have significant liquid assets to allow them to pay down their delinquent mortgage.
Working with Representation
This is a complex transaction, and if short sale is an option you are considering, an experienced REALTOR® can certainly help you make the best of this situation. When interviewing potential agents, be sure to inquire about their experience with short sales and find out if they hold any designations for buying and selling distressed properties.
It is also recommended that you obtain legal advice from an experienced real estate lawyer and discuss short sale tax ramifications with your accountant. If you do not know any of these professionals, your REALTOR® can recommend experts in these fields.
Selling Your Property as a Short Sale: If you have determined that a short sale is right for your situation, you need to initiate the process with your lender.
Note: Keep good records! Document all calls and keep photocopies of everything you send to the lender. With so many properties in distress, it is not uncommon for the lender to misplace your file.
Lenders typically have their own pre-determined requirements for short sale application, and may demand a wide array of documentation from homeowners; however, the following steps should give you an idea of the general expectations:
- Call the Lender. It may take several phone calls for you to reach the person responsible for handling short sales. Be sure to request the supervisor or manager who can make a decision on your account. They will most likely guide you to their website for a short sale application.
Your lender package may need to include the following:
- Hardship Letter. This is a statement of facts, which describes how your financial hardship came about. It makes a plea to the lender to accept the terms of a short sale on your account. Things that might qualify as a hardship include: job loss or reduction in pay, disability, and personal loss. Lenders are not typically empathetic to situations involving dishonesty or criminal behavior.
- Preliminary Net Sheet. This is an estimate of the total closing costs which should include:
- Sales price you expect to receive, or the actual offer you have received
- All costs of sale (including real estate commissions)
- Unpaid loan balances
- Outstanding payments due, including late fee
- Submit Letter of Authorization. Lenders will not disclose any of your personal information without written authorization to do so. If you are working with a REALTOR®, lawyer, and/or accountant, you will receive better cooperation by submitting a written consent to the lender, granting them permission to discuss your loan with those interested parties.
- Proof of Income and Assets. Always be honest and upfront about your financial situation, disclosing any and all assets. Assets include:
- Savings accounts
- Money market accounts
- Stocks and bonds
- Negotiable instruments
- Other real estate property
- Items with tangible value
- Copies of Bank Statements. Explain any unaccountable deposits, large cash withdrawals or unusual checks.
- Comparative Market Analysis. A comparative market analysis (CMA) will help the lender evaluate why you cannot sell your property for what you owe on your outstanding loan. Your REALTOR® can prepare a CMA for you, which will show prices of similar local homes that have typically sold within the last six months.
- Listing Agreement and Purchase Agreement. If you accept an offer to buy from a prospective purchaser, the lender will require a copy of the offer, along with a copy of your listing agreement. It is important to note that all offers are 'subject to lender approval'. The lender may renegotiate commissions and can refuse to pay for home protection plans and/or termite inspections. Since a majority of short sales are 'as is' transactions, the lender will also likely refuse contingencies for repair and requested credits.
It is important to understand that a short sale can damage your credit score, often appearing as a "settlement" which indicates that you paid less than you owed. As part of the short sale negotiation, you should request that the lender not report adverse credit activity to the credit agencies. Even though the lender is under no obligation to accommodate this request, they may be willing to work with you to minimize your financial damage. You could also be presented with a tax bill for the unpaid debt, which is generally considered as debt forgiveness, or income to you. A team of professionals may be able to avoid or, at the least, minimize these consequences. Please consult and seek professional help with an experienced REALTOR®, attorney and/or accountants.
This information is meant as a guide. Although deemed reliable, information may not be accurate for your specific market or property type. Please consult a REALTOR® professional for more information on making a written offer.