As foreclosures in the U.S keep on being commonplace all through these tough economic periods, several homeowners who are getting overwhelmed by their mortgage payments are looking at pursuing a short sale as an alternative to foreclosure.
A short sale must be approved by the mortgage lender, and not just every short sale applicant will qualify. In other words, while a short sale is a preferable alternative to a foreclosure, it is still a time-consuming, complex process. Sellers considering whether or not to attempt short selling their property need to know the processes and the various issues they may face while going for the short sale option.
What Does a Seller Need To Pursue a Short Sale
If the choice has been made to pursue a short sale, the first steps are to get in touch with a real estate agent knowledgeable in handling short sales in your area and also notify your lender that you will be attempting to short sell the home. But just because you decide to pursue a short sale does not ensure you’ll automatically meet the requirements from the lender. Among some other paperwork, lenders might request the following to determine if they will deem consenting to a short sale of the property:
Letter of Authorization:Â Contains the home address, name, date, your agentâ€™s name and contact info as well as the loan reference number
Hardship Letter: Describes the need of the homeowner for a short sale (i.e., unemployment, hospitalization, divorce, bankruptcy, etc.)
Proof of Income & Assets:Â Including any savings, money market accounts, stocks or bonds, or cash and other real estate
Copies of Bank Statements:Â You will have to show all deposit and withdrawals done over a period of time
Preliminary Net Sheet:Â An estimated closing statement that displays the predicted sale price, together with all the costs of the sale, unpaid loan balances and outstanding payments due
Comparative Market Analysis:Â Shows the prices of similar homes sold in that area
Tax Returns:Â As much as two years of tax returns
Â Problems Short Sale Sellers Face & Their Solutions
Seller Without Hardship
The most common short sale problem is when the seller has no hardship. Most sellers realize that a short sale implies the house is under water. You can’t do a short sale on a home that will auction for enough to pony up all required funds and pay the majority of the cost of selling. When there is insufficient value on a property to pay the sum due the bank, the home short sells.
Simply being short to the bank is not really reason enough to do a short sale transaction, in most cases. Generally, the bank expects for a hardship letter from the seller describing:
- The sellerâ€™s trouble
- What the seller did to fix the problem
- Why nothing seems to work
If the sellers’ situation is the same as it was on the day the seller took out the mortgage, the lender may be very unlikely to grant the short sale. Many banks insist upon a seller hardship. No hardship is a short sale problem that might lead to short sale rejection.
A solution to the short sale problem is either to try again after a hardship occurs or offer to partake in the bank’s loss by making a seller contribution.
Issue of multiple loans
Some smaller banks have a notoriety for being difficult. Commonly, those banks can go one of two ways. Either the bank will dismiss the short sale or the bank will endorse it, it’s either black or white and your chances are around 50/50 with these banks.
This does not imply that whenever you have a short sale with two loans that the second lender will cause problems, but this is not the case. The reason for the problem with the second lender is often the amount of payoff. The first lender may not want to pay out the second lender in excess of, say, $3,000.
If the home goes to foreclosure, fairly probably the mortgage with the second lender may well get wiped out. But it doesn’t mean the second has no recourse, or that the bank isn’t compensated by the PSA or stand to receive substantial bail-out cash from the federal government.
A solution to the problem is to put pressure on the second lender to accept the short sale or the first lender to contribute more. The first lender might back down and agree to pay more.
No Release of Personal Liability
Apart from eschewing the stigma and pitfalls of foreclosure, many sellers do short sales because they believe they’ll get a release of personal liability. Borrowers deserve to be relinquished from the mortgage, to know the lender will not pursue them for the deficiency after the transaction closes.
Granting the short sale and releasing a seller from personal liability are two different things. A bank can accede to do a short sale and still reserve the right to pursue the seller for the amount unpaid. Generally, if a short sale letter does not categorically address the issue, the seller is not relinquished.
The solution is to insist on being relinquished. The bank will tell you it cannot change the verbiage, but it’s the negotiator who chooses not to be bothered. Banks can and do change the clause. Insist on it. If your agent can’t get it for you, hire a short sale lawyer to obtain the release of liability.