While the name might imply that a short sale is a quick transaction, it can be anything but. The "short" part of a short sale refers to the bank taking a loss on the property, since the selling price is short of the amount that the seller owes. Short sales differ from foreclosures. The impact on your credit is a bit different with a short sale, and while both can cause a significant dip in your credit score, most short sellers recover in just a couple of years, while a foreclosure sticks with you for up to 10 years.
Basically, a short sale results from an agreement between the bank and the homeowner as a way to help the owner avoid foreclosure. Instead of losing the house to the bank, the owner sells the house at a loss. The real trick with short sales is that you have to get the bank to agree to the new, lower price since they'll be taking the hit for the difference.
In a short sale situation, the bank is basically agreeing to let the homeowner pay off less than the total amount borrowed. Say you took out a loan for $200,000, and now your house is worth $115,000. At the end of the short sale, the bank ideally agrees to let you pay $115,000 for that loan and eat the difference. Part of what makes this process take so long is that the bank doesn't tell you how much it wants for the property. Instead, they look at the offer from the buyer and decide whether to accept or reject. Waiting to hear back from the bank is the first of the delays in the short sale process.
If the bank accepts the offer, things can start moving along pretty quickly, but if they reject it, you're back to the drawing board. You don't need the bank's permission to seek a buyer that's interested in a short sale arrangement, but you do need the bank to approve you for the short sale before it can move forward.
The Seller's Role
Short selling is probably hardest on the homeowner. A short sale is rarely a first choice, so your house has probably been on the market for some time. Meanwhile, you're falling behind on your mortgage payments and money is probably tight. In order to get the bank to approve your short sale, you need to meet some criteria and prove them in writing:
- Financial hardship:You need to prove that a drastic life change, like a divorce or a layoff, is affecting your ability to keep up with your mortgage payments. The bank is going to want a hardship letter that explains your situation in detail.
- Proof that you're upside down: Show that your home is worth more than you owe, either through an appraisal or comps from a broker.
- You can't afford your mortgage payment: This should be easy to prove.
- You're not eligible for loan modification: Talk to your lender and have them verify that you don't qualify.
All of that paperwork is time consuming, and if anything is missing or filled out incorrectly, it can delay things even more. An experienced real estate agent can be a huge help here. Find someone who's familiar with short selling to help you navigate the process. Paperwork can often mean the difference between taking several months to close and missing out on the sale all together.
As the seller, you're also responsible for making sure that you get approval from all lenders that have a lien on the property, which applies if you have any other loans against your home, such as a second mortgage or home equity line of credit. You can't complete a short sale unless these junior lenders are also on board, and failure to contact them early can hold up the process or even cause the sale to fall through.
The Buyer's Role
If you're the buyer in a short sale, protecting yourself is the top priority. Because short sellers are in dire financial straits, there's a good chance the property is in some degree of disrepair. It's worth the $300 to $600 to hire a good, thorough home inspector that you trust. You'll also want to find out if there are any second mortgages, home equity lines of credit or other liens on the property. While it's up to the seller to get approval from all the lenders involved, you want to know what you're getting into. If the seller has to negotiate with any other lenders, it can draw the process out since those banks tend to take a greater hit in the short sale.
The paperwork can be a bit time consuming for you as a buyer: You'll need to fill out and probably have notarized an authorization letter, and you may need to fill out a short sale application from the lender. Being proactive with any paperwork can help save you time and stress.
The other big thing that you can do as a buyer to speed things along is to make sure your financing is in order. This is one area where you might even see things move more quickly if you work with the existing lender. The short sale paperwork includes most of the information they need for a loan, so you might be able to get a fast approval from the existing lender.
Short sales require jumping through a lot more hoops for everyone involved. It's not the ideal situation for the bank or the seller, but it's better in the long term than a foreclosure. For a buyer, the process can be frustrating, but it's worth it if you're getting a good deal on a home.
For more information, check out the links on the next page.
- Adkins, Jana. "The benefits of a short-sale process." The Santa Clarita Valley Signal. Jan. 4, 2011. (Feb. 24, 2011)http://www.the-signal.com/section/24/article/38685/
- Andriotis, AnnaMaria. "Are You Buying Into a Good Neighborhood?" SmartMoney. Dec. 15, 2010. (Feb. 25, 2011)http://www.smartmoney.com/personal-finance/real-estate/are-you-really-buying-into-a-good-neighborhood-1292360513981/
- Armour, Stephanie. "Home sellers frustrated as short-sale deals collapse." USA Today. Aug. 5, 2009. (Feb. 24, 2011)http://www.usatoday.com/money/economy/housing/2009-08-04-short-sales-mortgages_N.htm
- Bank of America. "Selling your home in a short sale." (Feb. 24, 2011)http://homeloanhelp.bankofamerica.com/en/short-sale.html
- Broemmel, Mike. "Short Sale Deficiency Judgment." San Francisco Chronicle. (Feb. 25, 2011)http://homeguides.sfgate.com/short-sale-deficiency-judgment-7220.html
- Dempsey, Bobbi. "10 steps to 'short sale' buying." Bankrate.com. Jan. 12, 2010. (Feb. 25, 2011)http://www.bankrate.com/finance/money-guides/10-crucial-steps-to-short-sale-buying-1.aspx
- Foust, Dean. "The new exit strategy: A short sale." Bloomberg Businessweek. March 5, 2007. (Feb. 24, 2011)http://www.businessweek.com/the_thread/hotproperty/archives/2007/03/the_new_exit_strategy_a_short_sale.html
- MortgageOrb.com. "Survey Finds Short Sales Closings Can Take Up To Nine Months." Feb. 24, 2011. (Feb. 25, 2011)http://www.mortgageorb.com/e107_plugins/content/content.php?content.7899
- National Association of Realtors. "Is Inexperience Hampering the Short Sale Process?" REALTORMag. Jan. 28, 2011. (Feb. 24, 2011)http://www.realtor.org/rmodaily.nsf/pages/News2011012803