GUIDE TO SHORT SALES
What is a Short Sale?
What is a Short Sale?
A Short Sale is a process that has been around for a few years but is now coming into much wider use due to the record number of homes entering foreclosure. Briefly, a Short Sale is an offer to a Lender to allow a Homeowner who is (usually) behind on their mortgage payments to sell their home if the Lender agrees to accept the contract price offered as payment in full for the mortgage amount owed, even if the offer is substantially less than the amount owing.
This typically works when the mortgage amount is more than the current market value of the home, where either the value of the home has dropped substantially since the Homeowner bought it, or where the Homeowner refinanced with a new, higher mortgage or took out a home equity line and the total amount owing on the home is now more than the home is worth. The increase in home values that took place between 2000 and 2005 tempted many homeowners to tap the increased value of their home for a payout.
The other situation that creates a Short Sale opportunity is where the original mortgage was an adjustable ARM with a floating interest rate and now the revised interest rate is more than the Homeowner can afford. If they have no equity in the home a Short Sale or a foreclosure are their only options.
What if there is a second mortgage on the property?
If there is a second mortgage or a home equity line of credit (HELOC) on the home the second mortgage holder, or lien holder, is in a precarious position. If the home is foreclosed on, they will basically lose their position. They are therefore usually willing to allow the amount owing to then to be drastically reduced so that they receive something rather than risk receiving nothing.
How does the process work?
The first step is for the Homeowner or Realtor to contact the Lender for a Short Sale package. This will list what the Lender requires in order to initiate the process, typically including:
– A release of information authorization signed by the Seller
– A sales contract signed by the Buyer and Seller. This should specify that the contract is subject to the Lender accepting the offer as payment in full for the amount owing on the mortgage on the property, among other conditions.
– A Listing Agreement with a Realtor.
– A hardship Letter from the Seller (Homeowner) explaining why they are unable to continue to make the mortgage payments.
– A financial statement from the Seller showing they have no assets to pay off the mortgage.
– The Seller’s tax returns for the previous 2 years
– Copies of the Seller’s past 2 month’s Bank statements.
– At least 2 months of the Seller’s pay stubs or income statements
– A Net Sheet or HUD1 statement showing the exact payoff amount the Lender will receive after paying all commissions and other expenses.
After the Lender receives the package, it is reviewed for completeness. If the Lender intends to even consider the offer, a BPO, or Broker’s Price Opinion, will be ordered from an independent Broker or Appraiser for a price opinion showing the comparable values of homes in the area. Eventually the file will either be put away as not worth considering or be passed to a Loss Mitigation Negotiator to negotiate a final selling price. If the initial offer is refused an acceptable compromise can still be negotiated.