Understanding Short Sales
Many people these days find themselves in the tough situation of owning a home that is worth less then the mortgage amount and needing to sell.
They may be facing economic hardship such as the loss of a job or struggling with medical bills and have found that they can no longer make their monthly mortgage payment. Foreclosure may seem to be the only option but a short sale might be a better alternative for the homeowner and the bank.
As the name implies a short sales is when a property is sold “short” or for less then the outstanding mortgage amount. The first question many people ask is why would a bank allow a short sale? The answer is that if they foreclose they could lose even more.
Let’s look at it from the banks perspective. Let’s say the mortgage amount on a home is $200,000 but the value is now only $175,000. If the bank forecloses they will receive no payments for up to a year while the legal process and redemption period run their course. Then when they take possession of a home the will need to change the locks, maintain the home, make any necessary repairs, insure the property and pay a real estate agent a commission to sell the home. When it is sold it will probably sell for less then $175,000 because buyers usually bid low on these types of properties. So if the bank sells the property for $160,000 and has spent $20,000 in fees and maintenance then they will only recoup about $140,000 of the original $200,000 mortgage amount.
Now imagine that the bank gets a call from the homeowner saying, “ I am a few months behind in my payments, I can not afford to continue to make these payments and I may have to let the home fall into foreclosure and I may need to file bankruptcy. But the good news is I have an offer on the home for $175,000 and they can close as soon as you approve the short sale.”
The math for the bank is clear. They will come out much father ahead if they approve the short sale.
Will It Always Work?
No. All lenders are different and have different requirements to approve a short sale. Also you will need to prove that a hardship exists and navigate the paperwork requirements. Below is a list of some of the items the lender may require. The process can seem daunting. But if you or someone you know needs to take advantage of a short sale I can help. I have all the forms required and I will deal directly with your mortgage company to negotiate a short sale. There are also third party companies that will help negotiate for you for a fee and in many cases that can be worth the cost.
Short Sale Checklist – Information Gathering
Compile the following information when creating a short sale proposal packet.
Financial Information
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Three most recent bank statements for all checking accounts for all borrowers |
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Three most recent bank statements for all savings accounts for all borrowers |
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W2s from the past two years for all borrowers |
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Income tax returns from the past two years for all borrowers |
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Past three paycheck stubs for all borrowers |
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Copies of all bills for all borrowers from the past two months. Will be used to compile a financial worksheet. Could include:
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Hardship Information
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Hardship letter that describes succinctly yet persuasively why the homeowner was unable to meet his or her loan payments. The homeowner must write the hardship letter. |
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Documentation of hardship. Documentation may include:
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Property Information
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Information about any additional liens on the home. The homeowner may have this information. Ask the homeowner if he or she has a recent credit report. Alternately, a present owner search would reveal whether there are any additional liens. |
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Recent Comparative Market Analysis (CMA) |
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Estimated HUD-1 |
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Estimates for any necessary repairs to the home. |
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Most recent property tax bill and proof of payment status |
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Proof of homeowner’s insurance coverage |
Lender Information
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Monthly statements from the first and second lenders |
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Name of supervisor in Loss Mitigation department |
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Direct phone number for Loss Mitigation department |
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Short sale application from the lender |
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Written authorization from the homeowner for the Realtor to speak on his or her behalf |
Other
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If homeowner filed for bankruptcy, name and number of bankruptcy attorney |
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If homeowner is in a law suit, name and number of attorneys |
