How does a short sale work is an important question for homeowners facing foreclosure. This special option can help borrowers reduce the stress and financial impact associated with having real estate repossessed by their lender. However, obtaining short sale approval is not an easy task and requires patience and perseverance.
There is no standard answer for how does a short sale work. Although mortgage lenders follow similar protocols the exact process will deviate. However, there are two standards that all lenders follow. The first is real estate short sales involve selling the property for less than the full amount owed on the mortgage note. The second standard is real estate cannot have entered into the foreclosure process.
With that being said, borrowers must be proactive in contacting their lender when they are unable to afford mortgage installments. Those who procrastinate will miss out on the opportunity to sell their home to avoid foreclosure and will be subjected to financial chaos that can affect their credit for years to come.
In order to qualify for real estate short sales borrowers must be in dire financial straits and owe more than their home is worth. Short sales are handled by the servicing lender’s loss mitigation department. Loss mitigators act as a mediator and will work with borrowers throughout the short sale process.
Banks typically offer borrowers options to help them remain in their home before agreeing to enter into a short sale contract. Common options include loan modifications, mortgage refinance, deferred payments, or real estate forbearance agreements. Since banks take a financial loss with short sales this option is only offered when no other solutions exist.
Once the option to short sale is presented, borrowers must provide financial records to their loss mitigator. Most banks require wage statements, tax returns, detailed list of income and expenses, bank statements, and information regarding financial portfolios and valuable assets.
Borrowers are required to submit a short sale hardship letter which outlines the circumstances which caused their financial distress. Hardship letters often make or break the deal, so it is crucial to take time to craft a well-written and concise letter.
Realize that a human being will read and evaluate your letter of hardship. Tell your story in a way that another person can relate to without sounding like a ‘poor-me’ victim. Always include information regarding steps you have taken to overcome financial challenges. Banks are more eager to work with those who are taking measures to help their self.
Financial records and letters of hardship are the key elements to gaining short sale approval. Make certain everything is in order and that you have provided every document requested. Once short sale approval is granted, it is time to sell the property.
Most mortgage lenders require borrowers to locate a qualified buyer prior to granting short sale approval. Others will grant mortgagors’ time to list their property through a realtor or possibly as ‘For Sale by Owner’. Unless buyers are purchasing the property with cash they must obtain preapproved financing. Borrowers must adhere to the protocol established by their lender, so it is important to have a thorough understanding of the process before entering into a contract.
One very important element of short selling is to determine if your lender will hold you responsible for the deficiency amount between the sale price and loan balance. This can amount to several thousand dollars and take years to repay. When borrowers are responsible for the difference and unable to pay the full amount, banks can obtain court ordered judgments which remain on credit reports until the debt is paid.
Mortgagors may require assistance from a real estate lawyer to negotiate a ‘payment in full’ agreement. This means lenders accept the sale price as payment in full toward the loan balance and borrowers are released from further financial obligation.
The short sale process typically extends between 4 and 6 months. Borrowers usually witness a decline in their credit score; particularly when deficiency judgments are issued. It is strongly recommended to consult with a real estate attorney or short sale specialist to ensure short selling is the best financial decision.