Here are six simple steps to remember when selling a short sale property.
- Identify the current situation
- Demonstrate provable financial hardship
- Enlist the services of a qualified agent
- Gather the appropriate documents
- Negotiate the process
- Proceed to sell the house
The short sale process for sellers starts when they become aware of their inherent lack of funds to cover their predetermined mortgage obligations. In other words, a homeowner’s impending inability to pay their principal and interest in full each month is a telltale sign that a short sale may be in order. It is worth noting, however, that short sales are the direct result of increasing hardships, and not a failure to make payments. That’s an important distinction to make, as short sales are voluntary; the homeowner will request a short sale if the burden of paying down their mortgage becomes too much. Homeowners who miss payments will face foreclosure which is an entirely different process, altogether.
It is true what they say: the first step is admitting there is a problem. Short sales are no exception. Homeowners that find it difficult to keep up with mortgage payments must admit as much if they are to be considered a candidate for a short sale. However, there’s more to it than admittance; they will have to actually prove their hardships. That’s where step two comes in: proving to the lender that the payments are too hard to keep up with.
Every lender has different requirements for processing short sales. In all cases, you will need to provide some kind of documentation. In order to complete the short sale process, documentation will typically be required from you, the borrower, and the co-borrower as well as from the real estate agent. You’ll also be required to complete an authorization form for the release of information to third parties. The reason for your request will also be required. This will include information about your property, loans and income as well as details on the circumstances that have made it difficult for you to stay up to date on your mortgage, creating financial hardship. In some cases, a request for a transcript of your tax return may also be required in order to verify your income information.
Information required from the borrower and co-borrower
If you are a wage earner, meaning you receive a W-2 from your employer, you will typically need to provide the following information:
- Two (2) most recent pay stubs (if more than one borrower, then provide two for each borrower)
- Time with the current employer in years and months for both borrower and co-borrower
- Your most recent and complete bank statement for one month (provide all pages, even blanks)
- Completed request for mortgage assistance.
- Completed 4506T-EZ, which is a request for a transcript of your tax return.
If you are self-employed, you will need to provide:
- A P&L statement / audited or reviewed YTD income statement
- Your two (2) most recent years of completed tax returns, both personal and business and signed including all pages – or 1099’s – or two (2) years filed and proof of extension
- Your last four (4) months of complete business and personal bank statements (provide all pages, even blanks)
* If you’re not using a business account, you may be required to provide written documentation as to why a business account is not used.
Everyone regardless of employment type or status must provide:
- Provide any recent statements supporting assets going back four (4) months.
- Most recent tax return signed including all pages, – or – most recently filed and proof of extension, signed and including all pages.
- Proof of occupancy (if owner occupied) – this can be in the form of a recent utility bill in your name at the property address.
If the loan is non-escrowed:
(a) Copy of the most recent property tax bill or bills along with copies of canceled checks for any and all applicable taxes, including County, City, and School.
(b) Copy of the current insurance declaration page for all applicable coverage types. The declaration will need to show the premium amount for homeowners, flood, wind, etc.
(c) Proof of payment of HOA (Homeowner’s Association) fees, if applicable.
If the property is non-owner occupied:
(a) Documentation showing rental income with copies of the rental agreement if a tenant resides on the property.
(b) Amount of principal, interest, taxes, insurance, and homeowner dues for your primary residence.
(c) Your primary residence address.
Documents needed from the real estate agent include the following:
- Listing Agreement
- Detailed listing history (MLS printout)
- Sales/purchase contract (signed offer)
- 3 comparable active listings / 3 comparable sales/pictures of the property and neighborhood
- HUD (estimated closing statement)
It should go without saying, but lenders aren’t overly fond of the idea of conducting a short sale, which begs the question: Why would lenders even entertain the short sale process? Why are they willing to let homeowners sell their homes for less than they owe on the mortgage? The answer is simple: it’s better to recoup at least some of their money from a short sale than to risk the homeowner falling into foreclosure.
Once the lender is convinced the homeowner can’t keep up with their payments, they may approve a short sale. When a short sale is approved, homeowners should consider hiring an agent who specializes in short sale transactions, as they will know how to navigate the process smoothly and efficiently. Provided they have done their job, the offers should come rolling in. However, short sales are anything but traditional. When homeowners receive an offer, they must submit it with certain documents to the lender to receive approval.
If the lender accepts the request, the homeowner may proceed like a traditional sale; if not, more negotiations may be necessary. Either way, the homeowner will have to work with the lender on landing a specific offer.
Benefits Of A Short Sale
Short sales can be beneficial for all parties involved. They provide greater investment opportunities for buyers and minimize the financial repercussions that both lenders and sellers would face if the property goes into foreclosure.
Short Sale Benefits For Sellers
- Foreclosure prevention: A short sale will prevent a seller’s home from going into foreclosure, which can have a far more detrimental impact on their credit score.
- Debt absorption: The majority of a seller’s debt will be paid off by the home buyer.
- Savings on fees: In a typical sale, a seller would have to pay for agents’ commissions, but in a short sale, the lender pays these fees.
- Potential debt forgiveness: It’s possible that the lender will accept the proceeds of the short sale and write off the remaining debt as a loss. In these cases, the seller is not held accountable for paying off whatever debt remains after the short sale.
- Housing market reentry: A short sale enables the seller to reenter the market and obtain a mortgage immediately with an FHA loan under the right circumstances. In order to do this, you have to have no late mortgage or installment payments in the last year prior to the short sale, and no late mortgage or installment payments in the year prior to applying for the new mortgage.
Drawbacks Of A Short Sale
Despite the benefits involved, there are still quite a few drawbacks that come with short sales. The process is complex and drawn out, which can increase the riskiness of the transaction and negatively impact buyers, sellers, and lenders financially.
Short Sale Drawbacks For Sellers
- No negotiation power: Although a seller plays an active role in the sale of the property, the lender is the only one with the power to negotiate the purchasing price of the home.
- Lack of profits: Since a seller owes money to the lender, they won’t receive any of the proceeds of the sale of their home.
- Credit score damage: A short sale can do real damage to a seller’s credit score. The higher your credit score, the larger the hit. However, short sales cause sellers’ credit scores to drop by fewer points than foreclosures.
- Delay in obtaining another mortgage: After a short sale, a seller must complete a waiting period before qualifying for a new mortgage. Outside of an FHA loan, the waiting period may be anywhere from 2 – 4 years.
- Deficiency judgment: In some circumstances, the lender will sue the seller in an attempt to retrieve the remaining debt after the short sale. If a seller is sued, their credit score will receive a blow similar to a foreclosure. However, this process is not legal in all states.
What can a seller expect from a short sale?
Sellers should plan to be involved in the short sale process. Usually, avoiding foreclosure is the seller’s goal, so that they can take out another home loan in the near future. A short sale can negatively affect a seller’s credit, but it usually lasts only a couple of years. In some short sale cases, banks will actually report the debt as “paid in full,” so a seller’s credit takes even less of a hit. In contrast, a foreclosure can negatively affect a person’s credit for up to 10 years.
Despite the fact that it seems like a win-win for buyers and sellers, if sellers think a short sale sounds like a great way to get out of debt that they don’t really want to pay, they should think again. Banking institutions require proof that sellers NEED to go through the short sale process. That proof can include being upside down on a mortgage, demonstrating financial hardship, and an inability to afford a current payment. Banks may even require a comparative market analysis that shows a person’s home doesn’t have a shot of selling for the amount that they owe.
Before Declaring Bankruptcy
If a seller is going through the short sale process but has other outstanding debts, they should be careful about declaring bankruptcy. A bankruptcy filing diminishes their ability to complete the sale if creditors are blocked from collecting mortgage payments along with other debts.
Just because a short sale goes through may not mean that a seller’s financial troubles are over. In fact, after the sale, it is possible that a bank can still come after the seller for the difference in the loan balance. Oftentimes, sellers can add a clause to their short sale agreement that prevents banks from doing so, but it may be wise to seek the help of an experienced real estate agent or lawyer to go over the fine print.
Undoubtedly, for both buyers and sellers, the short sale process can be long and arduous. It is always a good idea for a consumer to have an experienced agent, who has dealt with numerous short sale transactions.
For more information on Short Sales contact us at:
Phone: 833-534-0614
Email: info@significashortsales.com
Website: www.significashortsales.com
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