Selling In a Short Sale? What You Need To Know
For a homeowner who is underwater (owing more on the mortgage than what the home is worth) and in financial distress, going into foreclosure is usually viewed as the worst case scenario. Selling the house as a short sale can be a less damaging alternative. Knowing what a short sale is and how a short sale proceeds is important for homeowners who are having a hard time making their mortgage payments.
What A Short Sale Is
A short sale is a scenario that sometimes occurs when the money owed on a property is more than the value of the home. For example, a homeowner buys a property for $250,000 and takes out a $230,000 mortgage. After some time, the homeowner experiences a financial hardship and falls behind on mortgage payments. The homeowner owes $220,000 but a new appraisal of the property shows that the property's value has dropped to $190,000 since the home was purchased. The homeowner is now underwater and owes more on the home than what it is currently worth.
If the homeowner attempts to sell the property for its current market value, the bank will still expect to be paid the full amount owed on the mortgage, regardless of what the seller receives. As a result, in most cases, when a home seller tries to sell a home for less than what is owed, the homeowner must get permission from the bank to sell the property. Sometimes banks will allow a short sale to go through, other times the request is denied.
How A Short Sale Differs From a Standard Sale
For the Nesbit MS home seller, a standard sale usually has little to do with banks and lenders. In these cases, the home is sold, the mortgage is paid off and the seller keeps what funds are remaining. However, in a short sale, the bank or mortgage holder is intimately involved in the sale process. During the short sale, the home seller must confer with the bank at nearly every step of the way, to ensure that the lender approves of the sale, is aware of the sale and is willing to negotiate with any potential buyers. This communication between the bank or mortgage company is important as the mortgage holder will record the monetary loss on the sale of the home (the difference between the selling price and the mortgage amount.)
It takes a lot of time and paperwork to keep a bank involved in the sale process. Although standard sales are time consuming, short sales are even more so.
Starting the Short Sale Process
The short sale process usually begins by the homeowner contacting the mortgage holder or bank. Usually short sales must be authorized by a specific department within the bank or mortgage company. It is important to keep track of whom the homeowner speaks to and records the time, date and details of each conversation. The homeowner should be honest and straightforward with the mortgage holder or bank when they speak with them.
Documents to Submit to the Bank
In most cases, a homeowner pursues a short sale if they are in financial hardship. Not every bank or mortgage holder will approve a short sale on a home. If it is thought that the short sale will generate too much in a loss to the bank, or if the bank determines that a short sale is unjustified, the short sale may be declined. But prior to this decision and for the homeowner to make their case for a short sale, they will be asked to submit a variety of detailed documents that show the need for the short sale and proof of financial hardship. A few of the documents that may be requested are;
- Hardship letter. The hardship letter is exactly what it sounds like; it's a letter that the homeowner writes to the bank to explain the personal hardship that lead to the request for a short sale.
- Preliminary Net Sheet. The preliminary net sheet is a statement that shows how much the home should sell for, how much the sale will cost and the balance on the loan.
- Comparative Market Analysis. This is a report that proves the house has devalued since its last purchase, usually prepared by a real estate agent.
- Purchase agreement. The seller must provide a copy of the potential purchase agreement, which the bank may try to renegotiate.
The homeowner must also provide the bank with copies of bank statements and information about their assets, and if they plan to use a real estate professional, they should also submit a form authorizing the bank to work with the real estate agent.
Know When to Wait
If the mortgage holder has approved a sale and there is an offer on the home, the homeowner seller and potential buyer must wait for a response before proceeding to close. In many cases, banks or mortgage companies may take anywhere from 30 days to many months before they respond to an offer. It is important for a potential buyer of a short sale property to be aware that short sales often take much longer to approve and process than regular home sales. Should the buyers offer be accepted, the home selling process generally proceeds like any other home sale.
Contact A Real Estate Professional
Short sales are very complex, and many homeowners do not have the expertise to navigate a short sale on their own. A short sale is not similar to a for-sale-by-owner transaction. Working with a real estate professional during a short sale is very important. If you're a homeowner who is hoping to sell your home as a short sale, contact a real estate professional today. He or she can help you get your short sale off the ground.