Short sale meaning:
A short sale, also known as pre foreclosure, is the sale of a real estate property for which the lender is willing to accept less than the amount still owed on the mortgage to facilitate a sale of the property by a financially distressed owner. The lender forgives the remaining balance of the loan. For a sale to be considered a short sale, the homeowner must be so far behind on payments that they can’t catch up.
But many short sales don’t get approved. They fall through for a variety of reasons, particularly if there’s more than one lien against the property. All lien holders must consent to the short sale under the same terms.
The process can admittedly be tricky, but an understanding of the steps involved can go a long way toward ensuring success for buyers and sellers.
A lender isn’t likely to approve a short sale, if there’s enough equity in the property to allow it to sell and at least break even if it foreclosed instead. The homeowner must be upside-down on her loan, meaning, with missed payments. she owes more on the mortgage than the home’s fair market value.
This makes the first step critical: The value of the home must be established right at the start! Keep in mind that the lender will want proof of the value.
STEP 1. A real estate agent can prepare a FREE comparative market analysis (CMA), or a broker can provide a FREE broker’s price opinion (BPO).
A professional appraisal can be a powerful tool. This will cost you $300-$500. But wait before spending this money! Usually, the lender might be satisfied with the FREE one from your real estate agent.
STEP 2. The seller must, prepare a financial hardship letter detailing the reasons that he’s unable to continue making mortgage payments. The short sale won’t be successful without it. These documents are proof and could be in the form of medical bills, a notice of job termination, pay stubs or anything else official that can prove your current situation.
It must be convincing and complete. The lender must immediately understand that the seller is in a position where the situation is either a short sale, foreclosure, or bankruptcy. The hardship your experiencing isn’t likely to be resolved in the near future.
The Short Sale Package
Once you’ve gotten the approval of your lender to sell your home as a short sale, it’s time to create your short sale package proposal and start looking for potential buyers.
If you haven’t already, you should consult a real estate agent, tax professional and attorney, because short sales are more complex than your average property sale. If you make a mistake in the process, it could cost you substantially more than normal.
Here are the documents for your proposal you will need to sell your home short sale:
- Request a short sale application from your lender because your lender will need to grant you a Short Sale Approval.
As a rule, only approach your lender with a request for a short sale when your mortgage payments have gone into default, and when you’re unable to continue making any payment at all.
As with any property sale, you’ll need to find a buyer for your short sale. In order to do that, you need your short sale proposal.
- The sales purchase contract should clearly state that the sale is contingent upon the lender’s approval.
- Include a copy of the listing agreement between seller and real estate agent showing commission fees due to the real estate agent(s) upon sale.
- Proof of the buyer’s ability to purchase, such as a buyer’s pre-approval letter from his lender or proof of cash deposits in an account.
- An arm’s-length affidavit is also often required. This indicates that there is no collusion, no pre-existing relationship between the buyer and seller. Buyer and seller are not related. The proposed sales price is truly that of fair market value.
Your short sale presentation should back up the statements made in the hardship letter. Prepare a thorough and detailed set of documents and financial data to support the claim that a short sale is a good solution for the lender.
You can use bank statements, proof of income (or lack thereof), proof of the value of any assets, credit card or other loan statements and tax returns. Additional examples include proof of a death in the family or illness. Be sure to use anything and everything that will substantiate the information outlined in the letter.
The CMA, BPO, or appraisal should indicate that the home isn’t going to sell for as much as or more than the short sale offer in the current market.
The lender’s loss mitigator will evaluate your numbers if you prepared a thorough short sale package, and he’ll be gathering some numbers of his own. His goal is to ensure that this indeed is a situation that can best be saved by a short sale.
Negotiate the Short Sale and Go to Closing
Ultimately, one of four things will happen after the loss mitigation review:
- The lender will approve the offer and issue a letter outlining its terms for the deal.
- The lender will reject the offer outright.
- He might also reject the offer contingent upon certain circumstances that can be remedied, indicating that it will approve the deal if the remedies occur. Usually it is the purchase price!
- Finally, the lender might do nothing at all. It is acceptable, and necessary to keep hammering away at eh lender until you get an outright rejection or at least some type of definitive response.
If the sale is a go, the lender should issue a preliminary settlement or closing statement, detailing the date of closing, all closing costs, and if there are multiple lienholders, how much money each is to receive from the sale.
If there are no other lienholders, the lender collects all the proceeds at closing. The seller does not receive any money from the sale. Remember, by definition, the seller still owes a balance on the loan against the short sale property.
Understanding Your Options
Any number of circumstances can lead to financial hardship. If you’re a homeowner and paying your mortgage has become a challenge, talk to your lender to discuss your options. You may be able to negotiate a loan modification or revised payment plan. Make sure a short sale is the right decision for you before committing to it
Selling a home through a short sale is different from selling a property at a foreclosure auction, or one that is actually owned by the bank, known as an REO or real estate owned property.
In a short sale, the proceeds from the transaction are less than the amount the seller needs to pay the mortgage debt and the costs of selling. For this deal to close, everyone who is owed money must agree to take less, or possibly no money at all. That makes short sales complex transactions that move slowly and often fall through.
For the most part, everyone gets some sort of benefit in a short sale, although everyone gives up a little, too. In the end, a short sale is about selling the home BEFORE it is too late and the seller goes into foreclosure.