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.
- 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.
- 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!
- 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.
- 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!
- 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!