Understanding Short Sales

There are many flavors of compromise you can strike with your lender  if you are facing foreclosure.  One of the toughest to execute is the short  sale.

What Is a “Short Sale”?

The title  “short sale” is somewhat misleading; many assume that “short” means  quick, implying a transaction that has a short escrow period. Au  contraire. A short sale refers to a homeowner’s sale of their home for a  net sales price (after commissions, closing  costs, etc.) that is less than what the homeowner owes their  mortgage lender(s).

Why Is a Short Sale Desirable?

A  short sale is an alternative to foreclosure. A short sale prevents you  from having to go through the foreclosure and eviction. A short sale  does make a smudge on your credit report but is much less traumatic to  your credit than foreclosure.

What Makes a Short Sale Hard to  Complete?

Because a short sale results in the lender losing  (a) funds they are owed and (b) the property which secured the mortgage  loan, these transactions must be done with the full participation and  agreement of the homeowner’s lender(s).

Lenders are  institutions, not people. They often move at a snail’s pace when  evaluating a request for a short sale. Short sales are more frequent in a  declining market — many lenders are simply not equipped to handle the  deluge of short sale requests they receive.

Realtors who work on  short sale transactions all have stories of trying for weeks to get the  short sale “package” to the correct person in the loss mitigation  department! Once the package is in the hands of the right person, the  bank may have some reason they disagree with the deal between the buyer  and seller, and may insist on inserting the bank’s price increase,  reduction in closing cost credits, or other major alteration of the  terms of the deal.

During a short sale, the buyer, seller and even  the real estate agents are somewhat subject to the whims of the bank —  the deal cannot be done without the bank’s agreement.

How to Get Your Lender to Agree to a Short Sale

With  all that said, short sale transactions are completed every day! Because  the lender is likely to take so much time processing your short sale  request — and because time is of the essence — you must ensure that  your short sale request itself is as articulate, thorough and persuasive  as possible. Here are some concrete actions you can take to maximize  your chances for success.

  1. Approach your lender as soon as  you think you might need to request a short sale.    If you are  struggling to make your mortgage  payments, list your home with a reputable real  estate agent as soon as possible. If they advise you that your home  is likely to sell for less than you owe on it, immediately contact your  lender’s “workout” department to request a short sale package. If you  can get your lender to indicate how much of your mortgage they are  willing to forgive up front, you boost your chances of working with a  buyer to create a deal that is a bargain for them, but likely to be  accepted by the bank, too.
  2. Authorize your real estate  agent — in writing — to work and to negotiate directly with the  lender.    But make sure to stay on top of the communications  between your agent and your lender. Delegate; don’t abdicate!
  3. Make  sure an offer is presented in its best light.    Make sure your  real estate agent includes a cover letter that explains the buyer’s  qualifications to buy your home, how much down payment money they  propose to put in — anything that might boost the lender’s confidence.  If the buyer is requesting any closing cost credits, be sure to tell the  lender if the buyer is a first-time  homebuyer; lenders are more likely to agree to concessions for  first-time buyers than for investors.
  4. Your lender will  request a hardship letter from you.    Make sure you handwrite it,  and present your finances in the worst light. If you lost a job, had an  illness or death in the family, are a senior citizen or have any other  circumstances then let the lender know! Let them know that you are  considering filing bankruptcy, and that this short sale would prevent  you from doing that; because bankruptcy stops the foreclosure process  cold, the lender would much rather approve your short sale than have you  file bankruptcy. Also explain any facts that might make it harder for  the bank to resell your house — anything that makes the bank grateful  that someone has made an offer!
  5. Make sure your  short sale package is impeccably thorough.    At a minimum, the  lender will want to see:
  • The offer to purchase your  home, including the buyer’s preapproval letter;
  • Your hardship  letter;
  • A balance sheet listing your monthly income and  expenses;
  • Statements from your checking, savings and other asset  accounts;
  • A net sheet from your real estate agent listing all  of the closing costs that must be paid for your short sale to close;
  • Supporting  documentation, including two months’ worth of paycheck stubs and all  your bills;
  • Your last two federal income tax returns.

Don’t  make them have to come back and ask you for any of these items. Make  sure the package is complete the first time your real estate agent sends  it!

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