Tips for Navigating the Short Sale Process

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With homeowners defaulting on their mortgages at a record pace, many people are practically begging their lenders for some form of relief or assistance in order to prevent themselves from ending up on the street. While it is certainly disconcerting to receive collection letters and threats of impending foreclosure from a lender, those who are falling deeper into debt and enduring difficulty making their monthly mortgage payments need not despair. The “short sale” is one alternative worth considering as a viable means for resolving your debt with the lender and dealing with a home that is no longer affordable. Here are some basics you need to know before starting the short sale process.

What is a Short Sale?

A “short sale” occurs when the net proceeds from the sale of property is not sufficient to satisfy the outstanding mortgages on the property, and the seller does not have the financial ability to make up the difference. The lender is asked to take less than the full amount owed in order for the sale to be completed

What Causes A Short Sale?

Sometimes a short sale is brought about because the homeowner borrowed more than he/she could afford to pay back and miscalculated his/her financial status. Often, the short sale arises because of an unforeseen change in the homeowner’s life, such as a long-term illness, disability, divorce or loss of employment, which has dramatically affected the person’s income such that the mortgage payments are no longer affordable.

Why is the short sale a viable option for the seller?

A foreclosure can have a devastating impact on someone’s credit report that has a lasting effect for years to come. A short sale is typically reported on a credit report as a debt that is “settled for an amount less than what is due”. While this will cause a dip in credit score, it will be nowhere near as harsh as the reporting of a foreclosure.

Why would a lender agree to a short sale?

The answer is very simple: Lenders do not want to own houses. Lenders are in the business of loaning money, not in the business of stockpiling real estate. There have been numerous reports that banks can face fees of up to $50,000.00-$60,000.00 in actually foreclosing on a property. From a business standpoint, the lender will make out better if the property is put on the market and given an opportunity to attract a buyer through private sale.

How does the short sale process work?

Most lenders have a short sale package containing documents that the seller must submit in order to have the short sale approved. Such documents include: hardship letter from seller/borrower explaining why the short sale is necessary, seller’s financial statement, two most recent pay stubs, two most recent bank statements, two most recent tax returns, copy of an Agreement of Sale with buyer, copy of proposed settlement statement (HUD-1) demonstrating net monies to the lender. Once the package is submitted to the lender, a negotiator is assigned to the file who handles the short sale on behalf of the lender through closing.

Miscellaneous Points to keep in mind

  • If you find a buyer, don’t expect closing to take place quickly. It may take 60 days, 90 days or even longer, depending on the lender, to get approval from the negotiator for the short sale to go forward.
  • Lenders are not properly staffed to handle the number of short sale requests. In order to make sure that your file doesn’t linger on someone’s desk, you need to be persistent—your agent or attorney should make frequent calls to the negotiator in order to insure that your short sale moves forward.
  • You must negotiate for the release of both the property and the underlying personal debt secured by the note. If you fail to do this, the lender may not forgive the personal debt.
  • It is wise to consult with an attorney and real estate agent who has been through this process before and has significant experience working with lenders. Also, attorney’s fees come out of the lender’s net proceeds. Therefore, you will not have to pay out of your own pocket for an attorney to assist you in the transaction.

Photo: Susan Goulding

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  1. Wonderful write up on Short Sales! I was actually considering one last year, but ended up going with another property. Hopefully a lot of new homebuyers know about this, because it will be a wonderful way to obtain property this year!

  2. Nice article on short sales and just wanted to add that it helps to be very, very detailed and to keep track of all correspondence/discussion with negotiators.

    Our short sale files get pretty extensive really, really fast.

  3. I am recently divorced and got approved for a short sale even got a bid i know it will take about 3 months to get the lender to approve but what steps can i take to protect myself from any fees? And what kind of fees are there?And i am a active member of the military and a veteran can that help?

  4. Great post on short sales. I think your point about getting a real estate agent familiar with the process is probably the most important one. Its even better if they have worked with your lender before because they will have direct phone numbers that they can use to get to the underwriters processing your deal. I would also suggest that you be very tough in the negotiation process. The lenders may want you to bring money to closing or pay a zero interest debt. You should stick to your guns here and know that if the house is appraised for fair market value and you have a qualified buyer then the lender needs to take that deal or face owning the house when you foreclose.

  5. It’s amazing how back in 2006 to 2009, most realtors were not property “schooled” or educated on how to handle a short sale. It felt most were just playing the cards as they lay and tried to help home buyers and sellers go through processes very new to everyone. I think it was a heart breaking time for both buyers and sellers because the process wasn’t a guarantee and took some faith and TIME! At least things have gotten faster but are still a pain to complete.

  6. Good Article on short sales and how they are done, if they are done the right way. Right now I’m going thru a nightmare ordeal with a short sale, my credit has dropped 200 points in less than 4 months from start of short sale and i found out the property started a foreclosure proceeding on the property 3 months after default and during the short sale process , now is going to be foreclosed in May2012? Meanwhile i hear of people who stay in their houses 6 or more yrs until the actual foreclosure. I also heard of people renting out their places during foreclosure. I’m trying to do everything the right way and ive been in process of doing this short sale from the beginning.? last November?2011. Buyers and Sellers be aware that alot of people dont know what they are doing with Short Sales. Beware of realtors and attorneys who say they know short sales and do your research. In this city, it seems no one knows how to do one right, and properties go directly into foreclosures and now I know why. My property has been on the market 4yrs with no written offers with a regular sale, dropped the price 110,000 from org. price i paid for it. Appraisal went down$50,000 from the year i bought it. The contract to sign for a short sale was insane and was an anniliation leaving me with all expenses + extra costs, that even a regular sale would not have and was faxed to the bank without my confirmation or any addendums that i requested..and I never saw the HUD statement which was sent to the bank. I called the bank myself to find out what is going on..and found out about the foreclosure and their has been no contact from my attorney to bank in weeks since march 5th. nor to me as well, with no returned calls and bounced emails,. .. meanwhile ive heard of short sales that were so easy and done so easily and their credit started to return 1 year later. It all depends on the attorney, real est person, bank and the state you live in, thats part of it…but be aware of the people who say they know how to do one, as far as seller you can get really messed up and as far as buyer the same thing . Make sure that they know what they are doing and are professionals at it, because as far as i am concerned it has nearly destroyed me, and its not over yet. 200 points in a drop in credit is crazy, and, its not even finished with the short sale if it ever finishes. I had impeccible credit
    until this happened. So many people have walked from their houses and didnt look back and didnt care and some even rented out their houses and made money out of the deal..i even heard of one where he had a short sale and attorney asked him if he wanted to rent it during the short sale process. his credit returned in 1 yr. If your thinking of doing a short sale whether buyer or seller, do alot of research on it first..and approach it with extreme caution.,

  7. I think it’s very important for anyone considering a short sale to interview multiple realitors. And definetly check their references and the number of short sales they have been involved in. Also make sure they have done a short sale withing three months… the bank requirements and “accepted practices” change rapidly.

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