In the Sacramento real estate market the words "short sale" are becoming household words. However, there is a lot of confusion around exactly what a short sale is. You may be wondering:
- What IS a short sale & who can do one?
- How does a short sale work?
Let's start out with defining a "Short Sale" or "Short Payoff". When a homeowner owes more on their home than it is worth in the current market AND has a finanacial hardship (ie: cannot continue to make the payments) he may negotiate with his lender to take a "short payoff" or less than what is owed on the mortgage in order to complete a sale and avoid foreclosure for all involved parties. Note that not all lenders will accept short sales or discounted payoffs, especially if it would make more financial sense to foreclose.
Remember, you can't just wake up one morning and decide you're going to sell your home at a loss by asking for a short sale. Typically, lenders won't even consider a short sale if your payments are current. Lenders will be more agreeable to negotiation if your payments are in arrears. They want to see that you have a bonafied "hardship". Plus, if you have cash assets, the lender might try to tap those accounts.
If you meet the above criteria than the following steps must be take next:
- Call the Lender
You will probably have to make a half dozen phone calls before you find the person responsible for handling short sales. You do not want to talk to the "real estate short sale" or "work out" department, you want the supervisor's name, the name of the individual capable of making a decision. Be patient it takes a while to find the right person.
- Submit Letter of Authorization
Lenders typically will not disclose any of your personal information without written authorization to do so. If you are working with a real estate agent, title company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to talk with those specific interested parties about your loan. The letter should include the following:
- Property Address
- Loan Reference Number
- Your Name
- The Date
- Your Agent's Name & Contact Information
- Preliminary Net Sheet
This is an estimated closing statement that shows the sales price you expect to receive Iin today's market) and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions, if any. Your real estate agent or title company should be able to prepare this for you if you do not know how to calculate any of these fees. Note: if the bottom line shows cash to the you, the seller, you will probably not need a short sale.
- Hardship Letter
The sadder, the better. This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders are not inhumane and can understand if you lost your job, were hospitalized or a truck ran over your entire family, but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior.
- Proof of Income and Assets
It is best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lender are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving.
- Copies of Bank Statements
If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it's probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
- Comparative Market Analysis
Sometimes markets decline and property values fall. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show prices of similar homes
- Active on the market
- Pending sales
- Solds from the past three months.
- Purchase Agreement & Listing Agreement
When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement. Be prepared for the lender to renegotiate commissions and to refuse to allow payment of certain items such as home protection plans or termite inspections.
These are the basic steps of how a short sale is handled. Please keep in mind the lender is not obligated under any circumstance to accept a short sale. Feel free to email me with any questions you may have about the short sale process. Check back soon as I will be posting additional information on short sales such as how they affect your credit score.
