Short Sale Solutions

What is a short sale?

A short sale occurs when the net proceeds from the sale of the home are insufficient to pay off the Seller’s loan obligations and closing costs. Closing costs can consist of and include escrow and title fees, pro-rations for taxes, back taxes and broker’s commissions.

How does this happen?

Some Sellers find it necessary to sell their home only to find out that they owe more then they can sell it for. This typically develops in a difficult real estate market when property values fail to appreciate and experience a decline in value. The decline may be steep enough that the value is less then what is owed on it which makes selling it more difficult.

One of the factors that might contribute to the need to sell is how the loan on the property was financed. If the loan involved an adjustable rate mortgage (ARM) the initial interest rate and corresponding mortgage payment may be scheduled to reset to a higher rate and therefore the mortgage payment will increase to a level that the borrower can not afford.

The income the borrower is earning may be insufficient for the borrower to qualify for a loan modification so the only alternative available to the borrower is to try and sell the property.

What is a lender’s motivation?

The lender needs to determine what the best course of action is for the lender and its shareholders which, if the lender is a bank, are its depositors and shareholders. The ultimate goal is to reduce the loss the bank and its shareholders will sustain.

In a declining real estate market the lender has more to lose financially if the loan is foreclosed. The lender incurs legal costs to foreclose the loan, it incurs additional legal costs to protect itself if a bankruptcy filing is made, it incurs additional costs if it has to evict the homeowner and it incurs the cost to keep the property insured, maintained and secured until it is ultimately sold.

A lender must take those costs into consideration as well as the amount of time they anticipate it will take to finally sell the property and when they do sell what they will need to pay in real estate commissions and closing costs. In short, foreclosing on a property and carrying it for re-sale can be very costly to a lender so those costs must be carefully considered when reviewing short sale requests.

As regulated institutions lenders are expected to act fairly in the handling of such requests and therefore they must obtain documentation that support what decisions they make. Establishing the properties value is essential. Determining whether a true hardship exists for the borrower is also critical. In order for the lender to properly review the request and demonstrate to its regulators that it does not discriminate the lender will typically ask for the borrower to document their financial status, provide a letter explaining the nature of the hardship.

Short Sale Package

All of the documentation needed to start a short sale is commonly called a "Short Sale Package" and is usually submitted by the REALTOR® representing the seller, or the seller of the property.

Here is a Sample Short Sale Package (Please remember items may vary depending upon the lender):

  • Cover Letter
  • Authorization to Release Information
  • Sellers Hardship Letter
  • Seller's Financial information
  • 2 years w2's
  • 2 months pay stubs
  • 2 months bank statements
  • Supporting Hardship Info - HOA liens, medical/disability statements etc.
  • Repair Estimate for the property
  • Comparable sales for the property
  • Contract
  • Net Sheet
  • First mortgage holder may ask for a payoff amount from the 2nd
  • Second mortgage holder may ask for a payoff amount from the 1st
  • Lender may ask for an Initial Title Report
  • FHA and VA may have their own forms and special requirements as well

Short Sale Hardship Letter

There are many reasons why a homeowner might fall behind on their mortgage payment. In order to have your lender(s) look at the option of a possible short sale, you usually will need to prove a financial hardship. Obviously every homeowner has a unique explanation of “why” they are in their current situation.

Most lenders require the hardship letter for short sale approval. The homeowner should take this valuable opportunity to appeal to the lender(s) that the homeowner's situation is genuinely distressing and the lender(s) would be better off accepting the lesser amount in a short sale than to pursue a foreclosure. In the hardship letter, present the facts clearly and honestly. A well-written hardship letter will be able to explain the situation that caused you to fall behind and provide proofs of hardship.

Some of the most common financial hardships include:

  • Too Much Debt
  • Unemployment
  • Reduced Income
  • Divorce
  • Death of my Spouse
  • Separation
  • Medical Bills
  • Death of a family member
  • Payment Increase
  • Business Failure
  • Job Relocation
  • Illness
  • Damage to Property
  • Military Service
  • Incarceration
  • Other (Please Specify)

In this letter you want to explain the “hardship” that caused your delinquency. Remember you need to be able to verify what you say in your hardship letter! Get any and all documents together to do so and attach them with your letter.

Here are some basic tips to remember when writing your short sale hardship letter:

  • Start off with all the names on the loan(s) and the loan numbers
  • Explain your financial situation as well as your hardship
  • Explain what expenses you have decreased in order to try and make your mortgage payments.

Give us a call to today to discuss how we can assist you with your next transaction.

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