What is a Short Sale?
A Short Sale Can Help Avoid Foreclosure. Sellers are more often finding themselves in a situation where the market value of their home is less than the amount owed on their mortgage. Lenders are now more willing to agree to take less than the mortgage owed rather than to enter into foreclosure. While this can help sellers avoid the negative effects of a foreclosure, there are unique issues which sellers need to be aware of. There are three questions to ask when deciding if a short sale is right for you. They are:
- Can I sell the property at a reasonable price?
- Will the lender (and other lien holders) realistically approve a short sale at a reasonable price?
- Do I have the motivation to do everything necessary to get the property sold in a short sale?
How much of a write-off on the mortgage loan can the seller expect from the lender? The answer to this question depends on many different factors. They include the seller's financial condition, the broker's opinion of the value of the property (supported by a comparable sales analysis), the appraised value of the property, the extent of any deferred maintenance on the property, the length of the time the home has been on the market, etc. At the end of the day, the lender is trying to figure out whether it will realize less of a loss on its mortgage loan if it forecloses on the property or it agrees to a short sale.
What is in a typical short sale package? Before sending the package to the lender, it is important to make sure that it is complete, thorough, and organized. The lender will typically request that the package is not sent to them until there is an offer on the property. Generally, the items requested in the short sale packet are the following:
- Cover letter with a checklist of items requested
- Completed financial disclosure (provided by lender)
- Handwritten hardship letter
- Purchase Contract
- Net sheet or HUD-1 Form (prepared by closing attorney)
- Proof of income for past 2 pay periods
- Copies of last 2 bank statements
- Copies of last 2 years full tax returns and W-2s and 1099s
- 3rd party authorization form **It is important that the loan number be placed on each sheet of paper.
The following items are optional but recommended if possible:
- Deferred maintenance photos or list
- Comparable market analysis
- Statistics of foreclosures in the neighborhood
- Proof of active listings in the area that are lower and not selling
- Copy of MLS printout if property has been on the market for a long time
The process of approving a short sale normally takes months rather than weeks. The best way to shorten the approval process is to send the lender all the documents the lender needs at one time. If a case number is assigned to the request, make sure the case number is on the top of each document submitted.
Will my credit score be negatively affected if the lender agrees to a short sale? The answer to this question is 'Yes.' Any time a lender is not repaid in full, it will negatively affect the borrower's credit. However, a short sale will have less of an impact on a borrower's credit score than a foreclosure both in terms of numbers of years and the degree of negative impact.
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