Sometimes, homeowners find themselves in situations where they can no longer afford their home, they are delinquent in their mortgage payments, or are in pre-foreclosure. In this situation, cutting your losses, walking away, and moving on is often the best way to go. If you are a distressed homeowner and the current market value of your home is less then what you currently owe to your lender, a short sale is typically your best foreclosure alternative. Below we will discuss the five major things that distressed homeowners should know when considering a short sale.
1. What Does a Short Sale Really Mean?
A short sale is a legal term used to describe the fact that a property’s current market value is lower than what the homeowner owes the lender. This can happen for various reasons beyond the homeowner’s control, and in general, this typically becomes a financial hardship that is unsustainable for an extended amount of time.
For homeowners who are delinquent or at risk of being delinquent, and they do not want to go through a bankruptcy or the embarrassing process of foreclosure, short sales are often the best foreclosure alternatives.
2. You Will Need Your Lender’s Approval
The main thing that homeowners should understand about a short sale is that you will need your lender to agree to it. Essentially if a bank or lender agrees to a short sale, this means that they are accepting an amount that is less than what you owe on your current mortgage. This is not done frequently or freely as essentially, the lender is losing money. Therefore, not all lenders accept short sales. Furthermore, not every property is eligible for a short sale. The lender will weigh its options to determine if it is more beneficial for them to commence a foreclosure proceeding. In the event that a short sale is not approved by the lender, distressed homeowners should look into a possible loan modification.
Overall, lenders have the final say-so when it comes to approving a short sale. Another point to remember is that lenders will not suggest a short sale to a distressed homeowner. It is up to the homeowner to know his or her options and to contact the lender directly. In reality, most lenders hope that you can find a way to sell the property at a price high enough to satisfy your current loan balance. However, when is it is apparent that a homeowner has no other choice and the market value of the home is substantially below the loan balance, lenders may be more motivated to cooperate with a homeowner for a short sale. Most foreclosures do not end well. Often times the lender is forced to proceed with unruly and costly eviction proceedings because the homeowner will not voluntarily move from the property. As such, it’s usually in the lender’s best interest to work with the homeowner if a short sale is the best financial option.
3. Your Credit Will Still Be Damaged
Don’t be fooled into thinking that a short sale will not damage your credit, because it will. However, the damage is not as bad as it would be should you allow your home to go into foreclosure. Additionally, in the event that your lender forgives your debt, the amount forgiven must be reported to the IRS and may give rise to additional federal and state tax obligations.
4. A Short Sale is Very Different from a Traditional Home Sell
Under normal circumstances, when you are selling your home, your lender typically does not find out until your lawyer request a payoff for your current mortgage. On the other hand, as detailed above, your lender must be involved in the short sale process from the very beginning. Likewise, there is usually more paperwork involved in a short sale than would be if you were selling your home under normal market conditions.
5. You Increase Your Chances of Selling your Home in a Short Sale by Hiring a Real Estate Agent.
When going through the short sale process, homeowners are best served by hiring an experienced real estate agent who has 2 to 3 years of short sale experience. If you hire a real estate agent, he or she will be the person to submit your short sale application to the lender as well as negotiate the terms of the deal. Before you hire a real estate agent, confirm that the agent has experience in short sales in your local market. If your agent has substantial experience, this increases the likelihood that they have already dealt with your lender and are familiar with your lender’s requirements for approving a short sale. Likewise, an experienced agent will be able to see potential problems with your short purchase immediately and will be able to advise you on the necessary changes to make to increase the likelihood of approval.
Lastly, your agent may be able to find you a cash buyer who would be willing to purchase your home. This is often the easiest option, as you don’t have to deal with the buyer’s lender approving the transaction.
The application process for selling your home in a short sale typically goes like this:
1. Submit Your Letter of Authorization
Immediately when you hire a real estate/listing agent, you should submit a letter of authorization to your bank so that your agent can communicate with them directly. In general, your letter should include your information, your loan number/reference number, and your agent’s name and contact information.
2. Contact Your Lender
You or your agent will need to contact your lender and discuss your short sale with the specific department that is responsible for this process. Keep in mind you do not want to talk to the workout department or loss mitigation department. You want to specifically discuss your foreclosure with the short sale department or the department who will be responsible for the approval. The primary goal of this initial contact is to get a copy of the lender’s current short sale application and the contact information of the person who will be responsible for approving your sale.
3. Preliminary Net Sheet
Your lender will require that you fill out what’s called a “Preliminary Net Sheet.” This is the estimated closing statement that will indicate the sales price that you expect to receive, together with the cost of the sale, the unpaid loan balance, real estate commission, and late fees. Your lawyer can help prepare this for you if you do not know how to calculate any of these fees. In the unlikely event that the final number shows cash to the seller, this suggests that a short sale is not appropriate for your situation. In that event, a short sale may not be appropriate for your situation.
4. Draft a Hardship Letter
Your hardship letter is probably one of the most crucial points of your short sale application. This is the time to put everything about your financial situation in the letter for the lender to evaluate. The letter should notably have a statement of facts explaining how you ended up in your current situation. In closing out your letter, you will make a plea asking the lender to accept less than full payment for your mortgage loan.
5. Submit Proof of Income and Assets
When trying to entice your lender to approve a short sale, you must be 100% honest and work with them. Be prepared to disclose all of your financial information to your lender. Specifically, you will need to show your lender your bank accounts including checking and savings, any stocks or bonds you have, any other property you own, cash on hand, and ownership of anything else of tangible value., Likewise you should attach copies of your W-2s, credit card bills, student loan bills, and anything that shows your inability to pay your home loan. For the most part, banks are pretty objective; if your financial details show that you clearly cannot afford your loan, they usually will understand the situation. However, lenders, in general, are not sympathetic if you are dishonest, or your inability to pay is a result of criminal activity.
6. Your Agent will Prepare an Accurate Comparative Market Analysis
An experienced real estate agent will prepare a comparative market analysis (CMA) to prove to the bank that the market values of properties in your neighborhood have substantially fallen to the point that it will be nearly impossible for you to sell your property at a price high enough to cover your current mortgage.
7. Have Your Agent Prepare the Sales Contract
Once you locate a buyer to purchase your home, your lender will typically require a copy of the buyer’s bona fide offer together with your listing agreement and the sales contract signed by both parties. It’s not uncommon for the lender to renegotiate your agent commission as well as payment for other certain items (e.g., termite inspection.)
An experienced real estate agent will ensure that your sales contract is contingent upon the lender’s approval for the short sale. Lastly, most lenders will require you to submit what is called an arms-length affidavit, which basically says that there is no pre-existing relationship between the parties. This is done to ensure that the buyer is making a fair market value offer for your property and that the short sale is not a sham.
8. Wait for an Approval
Waiting for approval from your mortgage lender can be a frustrating experience. Typically, most lenders will drag their feet when it comes to processing a short sale. However, an experienced real estate agent will be persistent by following up with your lender to get approval (or rejection) in a timely manner