Short sales are being closed on every day. While the national volume of short sale transactions has slowed, they still make up a large chunk of total sales. For many investors, short sales have become the go-to method for finding deals. In most cases, these deals are obtained by whoever can answer seller questions the best. This is an extremely difficult time for any seller, and they need to be comfortable every step of the way. Even though the short sale process is much more common than it was a decade ago, there are still some lingering questions. Here are 5 answers to some of the most common short sale questions you will hear:
1. Do I need to be late on my mortgage?
In the past, it was almost a requirement that you needed to be late on your mortgage to start the short sale process. While some of the guidelines have loosened, lenders still need a reason to sell the property for a loss. Lenders will tell you that you don’t necessarily need to be late, but you do need a legitimate hardship. Without said hardship, it is difficult for a lender to justify accepting a short sale. Only a very small percentage of short sales are done without the homeowner being at least 60-90 days late. This doesn’t mean that being late is a guarantee of approval, but it gets the ball rolling. The more months you are late on your mortgage, the slimmer the chance that you can pay it off and get current. Once the process has started, lenders are much more open to moving forward with a sale. Most banks look at each situation differently, but as a general rule of thumb, the seller needs to be late before they will even look at the application.
2. How will a bankruptcy impact my transaction?
The moment a homeowner files for bankruptcy, the short sale process is effectively over. The idea of a short sale is to convince the lender to take less than the amount owed. Negotiating a short sale is considered a collection activity, and those are not allowed in a bankruptcy. While this puts an end to the short sale and temporarily provides the homeowner some relief, the impact is severe. Depending on the type of bankruptcy, it will stay on your record for either four or seven years. This will impact the seller’s ability to purchase property for that time in addition to establish any type of new credit. If a homeowner wants to stay in their home, they should explore any loan modification options that are available before pulling the trigger on a bankruptcy. A bankruptcy filing can provide short term relief, but the long term impacts can be much more damaging.
3. What type of paperwork is required?
Just because you want to sell your property doesn’t mean the lender has to accept. They need to agree to take a loss on the property. Submitting an offer for a short sale is like applying for a loan in reverse. Instead of wanting to see strong income and assets, they want to make sure you aren’t defaulting on the loan just to get out of the property. The first item they require is a hardship letter. This is a letter written by the homeowner documenting how and why they defaulted on their loan. This could be anything from the loss of a job, health issues or family emergencies. In addition to this letter, the lender will also ask for bank statements, income documentation, a copy of the purchase and sales contract, financial budget sheets and other lender specific information. If all of these items are not included in the package, the lender will not review the offer. The amount of paperwork can be overwhelming, but all of the items are needed.
4. How long does the process take?
If you were to ask this question a few years ago, the answer would have been months. It was not uncommon for a short sale to take over a year in the right circumstances. Recently the process has become automated, which has shaved months off the process. Having said that, a short sale can still take anywhere from at least 60 days to six months. The current average is between 60 and 90 days. Much of this depends on how the paperwork is submitted and the specific lender you are dealing with.
5. What if the lender rejects the offer?
The lender may approve the seller, but not the offer. Each lender has a loss mitigation department that decides what they will accept. Getting to a decision may take weeks or months, but if the offer isn’t accepted it isn’t the worst thing that can happen. If the property is in foreclosure, most states will allow an extension if an effort is being made to sell the property. When the offer is rejected, it works to give you and your real estate agent an idea on what the lender will accept. Knowing this information, they can list the property at a number that number and get it sold much quicker. This can actually benefit the seller by giving them a place to live while they get their property sold.
Short sales can yield great results, but they require a great amount of work. If you are going to work with distressed sellers who need to do a short sale, you need to know everything about the process.