The Complete Short Sale Guide

A short sale is when a home is sold for a value that is lower than the total mortgage debt still owed on the property. These transactions must be approved by the lender(s) and serve as an alternative to foreclosure, offering potentially preferable financial situations to both the lender and the homeowner.

Example: Your outstanding mortgage balance is $250,000 but due to the current market conditions or the condition of your home your house is only worth $200,000. Your lender must approve and allow you to sell your house “short” for $200,000 and agree to take a $50,000 loss.

Lenders will typically be willing to accept the “short” amount of sale proceeds if that value is greater than what they would gain through a foreclosure. Foreclosure procedures are lengthy and expensive to lenders, so if you can offer them a preferable alternative, they’re usually inclined to accept. As a homeowner, completing a short sale may be less detrimental to your credit and offer you more future loan options than if you were foreclosed on. If a short sale can be negotiated, both parties can benefit. In order to even apply, however, you must meet certain criteria.

As we previously mentioned, short sales are typically only approved if a foreclosure seems like it’s on the horizon. If your equity in the home can no longer cover your mortgage obligation and if you have encountered some change of personal circumstance that has made you unable to make your mortgage payment, your lender may approve the short sale. Potentially qualifying changes in your circumstances could be a reduction in your pay, total loss of your employment, bankruptcy, a divorce, large medical bills, or the death of an income provider. While at least one of these situations will likely be required to get your lender’s approval, many other situations may qualify you for a short sale as well, but it is not guaranteed. The lender does not have to agree to allow the short sale.

Having an experienced real estate professional helping you present your case to the lender may significantly increase your chances. We can handle the process from start to finish during this already difficult time. We will negotiate with your lender and you are only responsible to provide requested personal documents such as tax returns, paystubs and others. We will also find a potential buyer for your home and file all required paperwork for you to be approved by your lender for a successful short sale transaction.

Your most important task in this process is hiring a competent real estate agent to assist you. Short sales are not only complex for the homeowner, but also for the agents involved. Short sales are a specialized type of sale that not all agents are qualified to handle effectively. A real estate agent who is inexperienced in short sales may not know how to compose a complete short sale package for a faster transaction or how to negotiate effectively with the lenders. Hiring someone who is experienced and has a solid track-record with these transactions vastly improves your chances of success and can potentially negotiate better terms on your behalf.

Once you’ve selected your agent, listed your home for sale and found an interested buyer, you’ll have to submit some paperwork to the lender to see if they’ll approve the short sale. This collection of paperwork is usually referred to as the “short sale package” and should contain permission for us (or your selected agent) to negotiate with the lender, signed contract with a potential buyer, and various other requested documents pertaining to your financial situation. Although banks tend to have varying guidelines for what exactly they require when applying for a short sale, the package should typically contain:

• A letter of authorization for your realtor.
  This informs the lender that your realtor is representing you in the process.
• A valuation analysis via a comparative market analysis (CMA), or examples of other recent home sales in the area.
  This proof of the home’s value will help the lender determine if the short sale is worth it to them or not. The lender will also likely have their own valuation done.
• List of necessary home repairs
  While this isn’t always necessary, showing damages in the home can be additional proof of the reduced value of the property. Pictures and contractor estimate of the necessary repairs can help to convince the lender’s loss mitigator that the home would require monetary investment to bring its full market value.
• A hardship letter
  This letter is a personal account of your circumstances and why you can’t pay your mortgage. It should detail the reasons that you require a short sale, with documented proof if possible. You can read more about hardship letters and how to write one in our “How to Put Together an Effective Hardship Letter” article.
• Personal Financial Statement
  A summary of all of your income streams and assets demonstrating the inability to liquidate any assets to be used towards repayment of your mortgage and illustration of lack of adequate income to continue making monthly mortgage payments. If you have any mandatory liabilities such as medical expense, child support or alimony, those should be included as well.
• A purchase agreement
  The purchase agreement is a sales contract between buyer and seller. This signifies to the bank that there is an interested buyer for an agreed upon amount. The contract should include terms that make it clear that the sale is dependent on the lender’s approval. Lenders may also require an “arms-length affidavit” which states that the buyer and seller have no pre-existing relationship.
• Buyer’s pre-approval letter
  The pre-approval letter assures your lender that the potential buyer has the ability to pay off the total amount due at closing.
• A listing agreement
  Along with the purchase agreement, you should send the lender the listing agreement so they know what % of a commission has been offered to your real estate agent. They may try to renegotiate the commission and they often do.
• Sale proceeds statement
  A “Net Sheet” shows proceeds from the sale after all expenses have been paid such as closing costs, selling commissions, outstanding property taxes and other fees. This is necessary for the seller to determine what the approximate ‘loss’ will be after all expenses are paid.
• Documents to prove your financial standing:
  • W-2s or 1099s for the last two years
  • Your last two months’ bank statements
  • Tax returns from the last two years
  • Pay stubs from the last 30 days
  • Proof of any other income such as Alimony or Child Support
  • Proof of any financial obligations, such as medical bills, utilities, child support, alimony, etc.

Sounds complicated? Don’t worry, we are here to help you through every step of the process. The list of necessary items is long, but ultimately we can help you with each item aside from producing your personal financial documents mentioned in the last bullet point (paystubs, bank statements, tax returns and any W2s or 1099, etc.).

The lender’s process is what makes short sales fairly time consuming. Unlike the seller, they’re likely dealing with hundreds of similar sales and foreclosure procedures, so getting to your sale won’t necessarily be high on their priority list. This is why it’s important to have an experienced agent representing you. We stay on top of the bank and ensure that your situation is being dealt with in a reasonable amount of time and request ‘escalation’ if possible.

Once we have submitted your short sale package to the lender and made it clear that you wish to apply for a short sale, we should receive a notice that your file has been received by the bank within about 10 days. Do we always hear back within the 10 days? No… Sometimes it takes several weeks just to get the lender to acknowledge receipt.

The lender will then assign one of their negotiators to handle the deal and order a BPO(s) to get their own assessment of your home’s value. The lender will also need to review the Pooling and Services Agreement (PSA) associated with your mortgage. The terms in the PSA spell out how potential foreclosure scenarios are allowed to be handled and, in some cases, may prohibit a short sale.

To examine all of the financial aspects of the potential short sale, the lender will assign a loss mitigator. This person’s job is to crunch the numbers submitted in the package to see, not only if the deal is worth it to the lender, but also if the buyer and seller qualify. The loss mitigator will run a title check on the home to see if there are any other equity holders, check all of your financial documents, and assess if you qualify financially as well as if the short sale is in the lender’s best interest.

After the loss mitigator completes his review, you should receive a notice of the lender’s decision. The sale will either be approved, rejected entirely, or approved if the buyer and seller agree to certain contract alterations that the lender has proposed. If there are multiple lien holders attached to your property, all parties will also be notified of how the sales proceeds will be divided. Negotiations between lien holders may prolong and complicate the process, so be sure to check out our “Making a Short Sale with Multiple Lenders” article for more information on handling those more complex short sales.

As mentioned above, there is likely to be some back and forth between all of the parties involved in the short sale. This may be due to newly requested paperwork, updates on the situation, or demands for alterations to the contract terms. Who will cover closing costs, who is responsible for various fees or expenses, and what happens to any remaining mortgage debt after the sale. All must be negotiated. The outcome of these negotiations will vary from deal to deal; however, one of the most important matters is to establish what will happen to any remaining mortgage debt after short selling your home. Our goal is to negotiate terms so that any remaining debt, known as a deficiency, is wiped clear. This, however, is not always possible.

Once everything has been agreed upon, the lender should send you a preliminary settlement statement. This will outline how the proceeds will be split if there are multiple lien holders, the set closing date, and the closing costs.

Although you won’t profit from selling your home in a short sale, it’s a great alternative to foreclosure. Despite being time consuming and requiring a bit of effort, they can potentially be beneficial for all parties involved. The homeowner can avoid the consequences of a foreclosure, the buyer may be able to acquire the home at below market value, and the lender may be able to reduce their losses on the property.

Since the process can take several months to be completed, waiting in uncertainty can often become frustrating for both the buyer and the seller. It’s important to be patient and to regularly check in with your agent for updates on the situation. Staying on top of the lender and holding them accountable can help to streamline the transaction and keep everyone on the same page.