Demonstrating 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)
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)
Finding 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.
