Overview of the Short Sale Process

Seller Must Demonstrate Hardship:
Just because a home owner finds themselves "underwater" or owing more money to their lender than their home is worth, this does not automatically qualify them for a short sale.

A homeowner may have lost money on their home, yet may still be able to continue making their mortgage payments. For this reason, lenders want proof that the seller who is requesting a short sale is not only "underwater" on their loan, but is also no longer able to afford their mortgage payment and is in danger of losing the home to foreclosure.

Therefore, when considering whether to approve a seller’s short sale request, the lender wants to see proof of the seller’s financial hardship that makes keeping the home an impossibility. In many cases, the lender will not even discuss a short sale until the home owner is already behind on their mortgage payments.

If the lender believes that a hard ship exists and is willing to consider a short sale, they will request evidence of this hardship from the home owner. This may include bank statements; unemployment notices, credit card statements, tax returns, anything that backs up the seller’s claim of financial hardship. (See Short Sale Process Link)

Therefore, most sellers who convince their lender to allow them to sell their home through a short sale have successfully argued (and presented evidence to the lender) that they have suffered some sort of hardship and cannot continue making payments on their home loan. In other words, the lender must be convinced that the seller is at risk of total default (or foreclosure) or they will not approve the short sale.

Hardships can fall under many categories and include:

• Sudden medical condition or emergency

• Divorce
• Death in the family
• Unemployment
• Significant financial reversal (stock loss/severe home value loss)

Seller Must Have A Buyer:
If the lender is convinced that a financial hardship exists and that the home owner is in danger of losing their home to foreclosure they will next want proof that the seller already has a ready, willing and able buyer who has submitted a purchase contract offer to buy the home. The bank will not consider a short sale if a ready buyer does not already exist.

In other words, the package that goes to the lender to request a short sale contains not only the hardship financial letter and supporting documentation, it also contains an actual purchase contract from a qualified buyer who has already written a purchase contract on the home.

The lender will also want proof that the seller has actively marketed the home for a certain period of time and that the property has had ample opportunities to find a quality offer. It will want copies of the listing agreement with a Realtor, evidence of offer prices, dates the home has been on the market and evidence of price reductions all indicating that the current offer being presented is the best offer the home is likely to receive.

This means that the seller will have had to put the home up for sale, posted a listing price and have marketed the property as a short sale before they even have approval from the lender!

All of the above must happen in unison or the short sale has no chance. This is why the vast majority of short sales do not go through. Buyers often wait 2-3 months only to find the lender has rejected their offer outright. Chances are the offer was rejected because one or more of the above steps were skipped.

In order for a short sale to succeed, the price, conditions and terms must be agreeable to the seller, the buyer and most importantly, the lender, so it is a complex, three way transaction. For this reason, it is critical that both buyer and seller work with an experienced Realtor who understands this process and has a high success rate with closing short sale.

Seller Must Submit A "Short Sale Package":
Prior to pursuing a short sale, it is always advisable for the seller to obtain both legal and tax advice so they are aware of any legal or tax consequences which may arise as a result of the short sale.

The next thing the seller should do is hire a real estate agent – who is experienced in short sale transactions – and can help the seller find a buyer and assist in putting together the “Short Sale Package” to send to the lender.

This package will contain most, or all of the information the lender will need to make a determination about whether to approve the seller’s short sale request including information about the buyer and the buyer’s offer to purchase the home.

While each lender is unique and may have differing short sale guidelines, most will require the seller to provide some or all of the documents listed below which the seller’s Realtor will help prepare:

• Purchase Contract Outlining terms of buyer’s offer to purchase home

• Hardship letter outlining seller’s specific financial distress or hardship.
• Letter of Authorization permitting Realtor to speak directly to the lender
• Financial Documents outlining seller’s household income and liabilities
• 2 Months Bank Statements
• 2 Months Pay Stubs
• 2 Years Tax Returns
• List of Seller’s Monthly Expenses
• Realtor Listing Agreement
• Preliminary Title Report from Title Company
• Multiple Listing Data Sheet
• History of Showing Feedback and Activity on the home
• History of Price Adjustments on the Home
• Comparative Market Analysis on the Home
• HUD-1 from the Title Company showing total proceeds from sale

Lender Must Review and Approve Short Sale Package
Once the package has been sent to the lender, it will be assigned to a Bank Negotiator. The Negotiator’s job is to essentially crunch the numbers and determine the following:

• Does a true hardship case exist for the seller?
• What is the current market value of the home?
• What does the seller owe on the loan?
• How much is the buyer willing to pay for the home?
• Is this a fair priced offer?
• Would the bank net more money if they simply foreclosed on the home and sold the home themselves as a bank owned or REO property?

This is why the process can take 60-120 days and why buyer’s often walk away prior to the bank making a final decision.

After reviewing the package, the Negotiator has a number of choices:

• Accept the short sale and purchase contract as-is
• Accept the seller’s short sale request but reject the current purchase contract. In this case, the Negotiator can counter the buyer’s offer and the buyer must agree to pay the bank’s counteroffer price if they want the property.
• Reject both the short sale request and the purchase offer meaning the seller has failed to convince the bank or their hardship or the bank feels they will make more money by simply foreclosing and selling the home themselves

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