What Is a Short Sale? Understanding the Short Sale & the Short Sale Process
A short sale is a home that is available for a purchase price that is less than the amount owed by the current owner. Short sales can occur for different reasons, and experts usually can't agree whether short sales purchased are a good deal or not. However, short sales are a potential option for sellers to avoid foreclosure. While it remains to be seen whether the short sale is a good deal for the home buyer, it's usually a good deal for a homeowner who would like to avoid foreclosure.
If you're a homeowner in financial distress, or if you're a home buyer seeking a potentially good deal, you have much to learn about short sales. Knowing what a short sale is, how the process works, what long-term consequences can come from buying or selling a short sale, and advantages and disadvantages of short sales can help you decide whether a short sale is right for you. Whether you're a home buyer or a homeowner in the right circumstances for a short sale, here's what you need to know.
How Does a Short Sale Work?
To be considered a short sale, the house must worth less than the amount currently owed on the mortgage. This is a condition known as being "under water." Often, homeowners who pursue a short sale are also behind on their mortgage payments. These homeowners pursue the short sale as a way of avoiding foreclosure.
Sometimes, homeowners pursue a short sale simply because they want to move and cannot afford to pay the difference between their mortgage and the market value of the home. Short sales are usually initiated after the home drops by as much as 20% in value, thus eliminating any equity the homeowner had in the house.
In order to sell the home as a short sale, the homeowner must first prove that their home qualifies. To do this, they must find out their lender's qualifications, then gather information about their house to present as a package to the lender. The information the seller must include is a:
- Preliminary net sheet. This is a document that shows the value of the home is lower than the amount owed on the mortgage.
- Hardship letter. The homeowner must make a case to the lender to prove that the short sale is justified.
- Financial information. In addition to the letter of hardship, the homeowner must present the financial information that proves they cannot pay for the difference between the amount owed on the mortgage and the value of the home.
- Comparative market analysis. This document proves the value of the house by comparing the house to the other homes in the area.
Once there is an offer on the home, the home seller must also send the offer (or offers) to the lender. If the lender would like to proceed with the short sale, the lender may then choose an offer to counter. Other buyers who have made offers may wait for a long time without ever hearing from the bank.
Steps to a Short Sale
The steps to a short sale can seem rather simple, but in reality, short sales can be complex, long processes.
- Determine the value of the home to ensure that the amount owed on the mortgage is more than the value of the home.
- Write a hardship letter to make the case to the lender that the home should be sold as a short sale.
- Get a short sale application from the lender; fill it out and return it.
- Send offers from buyers.
- Create a package (including the financial statements, hardship letter and so on).
- Negotiate with the lender to come to an agreement.
Each step can take weeks in between, so a short sale can take several months.
Get a Property Valuation Analysis
A property valuation analysis is a report, often drafted by a real estate professional, that shows the value of the home. This document proves the value of the property by analyzing similar properties in the area. The real estate agent can prepare the comparative market analysis, but a broker also needs to provide a broker's price opinion.
The property valuation analysis must be produced at the beginning of the short sale process as a part of the supporting documentation that shows the short sale is justified. A good property valuation analysis helps the lender come to a price agreement when the offer on the home is made, as it will help the lender determine which offers are closest to the actual value of the home.
Get a Hardship Letter
Short sale hardship letters provide justification for the short sale. The lender will expect to see a hardship letter that outlines the reasons that the homeowner is experiencing financial hardship and can no longer make monthly mortgage payments. A well-written hardship letter can help the short sale approval process, but a poorly written hardship letter can prevent approval. Some tips for homeowners trying to write a hardship letter include:
- Keep the letter short and to the point.
- Describe the reasons for the hardship.
- Do not tell the lender that there is hope for the situation to improve.
- Do not tell the lender that the financial hardship is the result of poor personal choices (lost money gambling, etc).
- Do not mention ability to borrow money or get relief from outside financial resources.
The more hopeless the situation, the more likely it is the lender will approve the short sale. Still, a long and drawn-out letter is not the best way to tell the lender about the problem. Homeowners who are not sure if their hardship letter will be approved by their lender can work with their real estate professional to write a letter that is more likely to be approved.
Contact Lender for Short Sale Application
Lenders provide homeowners with short sale applications that must be filled out fully in order for the short sale to go through. Usually, these applications are distributed by a special department dedicated exclusively to short sales. Sometimes, finding the right department within the lender is difficult. Lenders are reluctant to approve short sales, and thus do not make finding the right contacts easy.
Short sale applications usually include a request for various documents, including financial statements, letter of hardship, etc. The homeowner must follow the application completely in order to help ensure success. Banks are not happy to approve short sales, so failure to fill out the application properly or completely could lead to the rejection of the application.
Prepare the Short Sale Package
The short sale package is the complete compilation of documentation, including the short sale application, hardship letter, valuation report, comparative analysis, and financial supporting documentation. The complete short sale package should have everything in it that the lender needs to determine whether a short sale is justified.
Homeowners may have their real estate professional review the short sale package. The more thorough the short sale package, the better.
Short Sale Package is Reviewed by a Loss Mitigator
Once the short sale package has been assembled and sent to the bank, the package is reviewed by a loss mitigator at the bank. The loss mitigator will evaluate the reports, supporting documentation, hardship letter, comparative analysis and the status of the mortgage to ensure that the short sale is the best option.
Although banks are reluctant to approve short sale packages overall, they are inclined to approve them if they think the short sale package is the best option. The short sale package should prove to the lender that foreclosure is the alternative. Foreclosure is a longer and more drawn-out process, and banks are often persuaded to allow a short sale to proceed if the homeowner can put together a convincing package.
The review of the short sale package can take weeks or even months. During that time, homeowners must wait. Each step of the short sale process takes longer than a standard home sale because of the additional steps required to coordinate with the bank. Homeowners who want to sell their home as a short sale should be patient. Homeowners who can continue to make mortgage payments during the short sale process may avoid additional damage to their credit, so budgeting during the drawn-out short sale process is important.
Negotiate Short Sale Closing
Once the homeowner starts to show the home to buyers, the homeowner may sign an approval for an offer. However, the final approval for the short sale purchase must go through the bank. The homeowner must send the signed home purchase contract to the bank and wait for a response. Banks may either approve the sale of the home at the agreed-upon price, or the offer might be rejected. The lender may also choose to do nothing at all or negotiate the offer.
Even after a signed offer is sent to the lender for approval, the homeowner may still choose to send along new offers for the home. This may continue until the lender has approved one of the offers sent. Even if the homeowner has signed a home purchase agreement with a potential buyer, the lender may choose a different offer if they get one that is better.
This is one of the risks that home buyers take on when they decide to make an offer for a short sale home. In fact, this is one of the reasons that short sales sell for less than market value: the risk of the deal falling through is high, and short sale purchases take a long time to be approved.
How Does a Short Sale Affect Your Credit?
Short sales stay on a credit report seven years from the date of the first delinquent payments or seven years from the date the home purchase was reported settled or paid. The higher the credit score is before the short sale occurs, the lower it may fall when the short sale occurs.
Homeowners who continue to make payments on their mortgage will see less of a hit than homeowners who do not. Short sales can affect credit by as much as 300 points, or even more, if they are very late on the mortgage payments. A homeowner who manages to continue to make mortgage payments, even if they are behind, may better control the impact on their credit.
Contact Your Real Estate Professional
Short sales in North and South Carolina are complex. For homeowners who have little experience with short sales, it's important to get help from someone who knows how to navigate the complexities of the system.
If you're a homeowner who believes that you may soon be faced with a financial problem that could result in a short sale, contact a real estate professional who has experience in short sales. Working with an experienced real estate professional can make the complex process of selling a home as a short sale easier and less of a burden. Your real estate professional can help ensure that your short sale will go through as quickly as possible. Contact a capable and experienced real estate professional today.