A short sale is when the owner owes their lender more on their mortgage balance than the property is worth and asks the lender to approve the sale of the property at a price less than the mortgage. The lender must then write off the remaining loan balance. The seller is free to walk away from the property and no longer owes the lender any money. The title of the property transfers to the new buyer. This is one of 10 effective ways to stop home foreclosure.
Short Sale Process & Steps
- Step 1 – The first step is for the borrower to contact their lender and find out if their property qualifies for a short sale. The borrower must show a financial hardship. If the borrower has other assets that they could sell to pay off their mortgage, then the property will not qualify for a short sale, and the owner will have to find other options to try and save their home.
- Step 2 – The owner will then want to list their property for sale with a knowledgeable Realtor in the area. The Realtor will conduct a comparative market analysis advising the seller what similar homes in the area are selling for, and the Realtor will market the property to potential buyers. The seller and the Realtor must make sure they advise the potential buyer that the sale is a short sale so that the buyer understands the sale is contingent upon the seller’s third party lender approving the terms and price of the sale. The lender will also pay the seller’s closing costs and brokerage commissions so the lender will need to approve the brokerage listing agreement as well at the time an offer is presented to the lender so there is the possibility that the lender may reduce the commission to the broker.
- Step 3 – The seller should also contact their real estate foreclosure defense attorney and meet with them to find out if there are any other options for them besides selling the home as a short sale, such as refinancing or a mortgage modification. Also, the seller may want to retain the attorney’s service to negotiate the short sale on the seller’s behalf or hire a short sale company to negotiate the short sale. Many title companies will do this if you use them as the title closing agent since most of them have attorneys that work or own the title companies. It also depends on the laws of your state as each state handles real estate closings differently.
- Step 4 — Once an offer is negotiated with the buyer, the seller or seller’s authorized representative will submit a short sale package to the lender which includes the seller’s hardship letter, seller’s authorization letter authorizing the third party to negotiate on behalf of the seller with the lender, the purchase and sale contract, the copy of the brokerage listing agreement, if applicable, the seller’s last two paycheck stubs, W’2’s or 1099’s for the last two years, two year’s income tax returns and most recent bank statement.
- Step 5 — Follow up is important once the short sale package has been submitted to the lender. You or your representative should follow up a few days after you send the package to make sure the lender received it. Then wait a couple weeks and follow up again to see if they assigned a negotiator. Keep calling on a weekly basis to find out the status. Once a negotiator is assigned, the process then goes faster. Typically, the negotiator will contact the seller or the seller’s representative about 45 days from the time they are assigned. The lender will counter the buyer’s offer, accept or not accept the offer. There is no guarantee that the lender will approve the short sale process.
- Step 6 — Hopefully, the lender agrees to approve your short sale. If the lender approves the short sale, then the buyer will provide the balance of the closing funds and the transaction will usually close within about 30 days or sooner from the time the lender approves the short sale.
Advantages and Disadvantages of a Short Sale
The advantages to the seller are that they can sell their home without it going to foreclosure and completely ruining their credit, and they can walk away from the transaction not owing the bank any money. The buyer gets to purchase a property at or slightly below the current market value so they are happy. The lender saves time and money having to institute a foreclosure proceeding. The brokers get paid their commissions by the lender, although sometimes they have to take a reduced commission as it is a short sale transaction.