If you’ve fallen behind on your mortgage payments or suffered a hardship that requires you to sell your home for less money than you owe the bank on your mortgage, a short sale may be something you’re considering. A short sale is when the sale of the home produces profits that are less than what the seller owes on the home. You can learn more about what a short sale is here.
Use this article in the series to learn more about the short sale process and what steps you need to take to potentially save your credit and not go into foreclosure on your home.
Before Considering a Short Sale:
- Talk to your bank!
If you are in a dire financial situation, before automatically considering a short sale, discuss your options with your mortgage lender. They may have programs that allow you to keep the property rather than sell it. If you absolutely must sell the property then remember…
- A short sale can be better for you than a foreclosure
When you’re in danger of losing your home due to an unforeseen circumstance, it’s definitely not the easiest time. A looming foreclosure is scary and, if you do end up having the bank repossess your home, it can leave a black mark on your credit score that will affect your financial status for years to come. A short sale can be a viable option for someone who is worried about a potential foreclosure. It will affect your credit but, because you’re making an effort to sell the home and pay back some of what you owe, it won’t damage your credit score as badly as a foreclosure would. You may lose your home, but you will have a better financial future with a short sale.
- You must default on your loan to have a short sale
Some sellers immediately panic if they run into a financial hardship and have to sell their house. They may decide to put their home up as a short sale, get a buyer, and attempt to have the lender approve a short sale, but beware! A lender will not approve a short sale unless the seller is behind in payments and an official default notice has been issued. As the seller, you must actually be in financial distress for a short sale to become a viable option.
- You cannot file for bankruptcy
If you’ve filed for bankruptcy, your chances of selling your home as a short sale are few and far between. A short sale is seen as getting money (or a collection activity) and that is prohibited during bankruptcy.
If you meet all of these qualifications, here’s what to do next:
How to Sell a Short Sale Home
Keep in mind that a short sale is fraught with complications and unexpected problems. Ultimately, the decision is up to the bank and their bottom line. If there is more money in the foreclosure and reselling of your home for the bank, they won’t consider a short sale. It’s whatever is best for the lender’s bottom line.
- Get a qualified real estate agent
The only way to go through a short sale is to work with a real estate agent who has successfully handled short sales before. Don’t go with an inexperienced real estate agent in this situation. The person who knows and understands what goes into a short sale is going to be invaluable every step of the way.
- Talk to your bank
Every lender handles a short sale differently. Universally, you will need to be in default on your loans for a short sale to work, but that doesn’t mean that you can’t discuss what you’ll need to submit before being to that point. Talk to your mortgage lender to see what they need from you. Try and talk to someone a bit higher up.
- Put the home on the market as early as possible
The longer your home is on the market, the better. First, you have more time to price it at a higher amount, and the longer it can stay there, hopefully attracting a potential buyer. In all actuality, if you’re going for a short sale, the price will have to be dropped multiple times to attract a buyer to the property. The longer it stays on the market without a potential buyer, the more you show the bank that you need to have a short sale on the property.
- Sign an Authorization Letter
To make a short sale work, you have to be flexible. Authorize your lender to talk with an agent or buyer about the financial situation at hand. This authorization letter will be included in the short sale approval packet you need to submit to ultimately sell a home as a short sale.
- Write a Hardship Letter
The bank needs to know what’s happening in your life that requires a short sale. Something like buying a boat and defaulting on your loans because you can’t pay both is not considered a hardship. Death, divorce, job loss or something of that nature, is considered a hardship. Write to the bank and explain why you’re behind on your payments, why you have no other way to sell the home or make your payments and explain what is causing you to sell your house as a short sale.
- Prove the property’s worth
You’ll need an appraisal of the property to show the bank that you cannot feasibly pay back the amount owed on the home. The lower the estimate, the more the bank will agree that a short sale is the only way to go in this situation. Not only are you convincing the bank to go with a short sale, you’re showing the bank that if they decided to foreclose on the home, they would be in a similar or worse financial situation if they attempted to resell the property.
- Prove your worth… or lack thereof
You cannot hope to go through with a short sale if you have excess assets you could use to make mortgage payments on the property or make the property more valuable. Prove to the bank that you don’t have a large amount in savings, you don’t have boats and entertainment things you could sell for liquid assets, you don’t have stocks and bonds that could be cashed… in essence, show them that you’re unable to pay back the amount of money owed to them for the mortgage.
- Get a serious buyer with a dependable offer
Although every lender is different, most won’t touch a short sale application unless a serious buyer is involved. You need to show that there’s a buyer who is willing to pay for the home by giving the bank the offer letter, how much money the buyer will pay. The buyer will need to provide a sizeable earnest money deposit to prove they’re interested, a pre-approval for a mortgage, and no contingencies on the seller (i.e. they’ll only go through the sale of the home if they can sell their current residence.). If a bank sees there is an interested buyer, the chances of having a short sale be approved go up dramatically.
- Provide a Settlement Statement
This is something an attorney or real estate agent (or both) can help you set up. Give the lender exactly the amount of money they’ll be getting with the sale of the home. The bank will use this to determine if it’s enough money to go through with the short sale and help the bank’s bottom line.
- Talk about getting a home warranty
If you can afford one, look at getting a home warranty for the buyer. Most provide free listing coverage while your home is on the market (Landmark provides coverage on repairs and replacements up to $1500.) This can help protect your buyer from repairs and replacements that may crop up from normal wear and tear of your systems and appliances. Look up the different plans and pricing here.
Some extra tidbits of information:
Make sure to go through the tax part of a short sale with your real estate agent and attorney. You may be taxed on the money forgiven by the bank.
If you have more than one lender, be patient and remember that it may take longer. This could put you into a bind. One bank may approve the sale, but the other may not. Make sure to talk this through with your real estate agent, who can help you understand the process.
Once you have put together all of these elements, you have to wait for bank approval. If they approve everything, congratulations! You've sold your home with a short sale. If they don't approve, talk with your realtors about your next steps.
Are you a buyer who's looking to buy a short sale? Read our article on what you need to know about buying a short sale here.