In order to successfully sell a short sale, homeowners will need to understand and meet the numerous qualification requirements. Otherwise, the lender may deny the buyer’s offer, negating all that hard work. Homeowners need to take the time to verify they meet qualifications before listing the property to ensure all goes to plan.
For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.
Qualifying for a Short Sale
Short sales are a popular alternative to foreclosure due to the lower impact on credit scores and the ability to secure a mortgage in the future. Many homeowners consider this option if they cannot keep up with their monthly mortgage payments. Others might look into a short sale if their home has significantly dropped in value.
To move forward with a short sale, homeowners must meet qualification requirements, and their lenders have to approve of the sale and prepare to accept offers lower than the loan balance. The following are situations that lenders will consider when approving or denying requests to sell the house at a reduced price.
The Home’s Market Value Has Dropped
When property values decrease below loan balances, homeowners end up with an underwater mortgage. This situation can put them in a bind if they want to sell the home and move elsewhere as the new sales price would simply not cover what is owed on the loan. Getting approved for a short sale could allow the home to sell below the principle and potentially free the homeowner from paying off the difference.
Common scenarios leading to home values decreasing include:
- Housing market crashes and other economic difficulties
- Environmental changes
- Decline in quality and value of nearby residences
- Closure of popular neighborhood amenities
Seasonal fluctuations can also decrease home values below the principle on the loan. If a move coincides with a real estate market slow down, home values may decline too much to make that possible. At that point, one viable option is to pursue a short sale.
The Mortgage is in or Near Default Status
Upon buying a home with a mortgage, there are many conditions homeowners must abide by throughout the life of the loan. If they do not fulfill those obligations, then the mortgage could be put in default status.
A variety of different scenarios can result in the mortgage entering default status, such as:
- Failing to pay property taxes in full
- Missing homeowner insurance payments
- Letting the property fall into a serious state of disrepair
- Deed transfer without lender approval
Upon noting any of these situations, most mortgage terms allow lenders to accelerate the debt. In case of a loan acceleration, the full balance of the loan becomes due immediately. Most lenders send out a notice before loan acceleration happens, allowing homeowners to remedy the problem before the total comes due.
Without a response from the borrower, the lender has the green light to start foreclosure and eventually take control of the property. Although they may have to wait 120 days to abide by federal law, certain situations void that requirement, such as violations of a due-on-sale clause.
The Seller Has Fallen on Hard Times
When financial hardship results in an inability to make timely mortgage payments, foreclosure could quickly follow. Lenders often start foreclosure proceedings within 120 days of default on payments. Without taking action in that time, the lender will claim the home and sell it on their own to recoup their costs.
The most important action a homeowner can take in the face of financial difficulties is to contact the lender. In times when a homeowner is struggling to make payments, a lender may present various alternatives to foreclosure, including short sale. Homeowners will likely need to write up a hardship letter explaining the cause of the hardship as an official request for assistance.
Hardship cases accepted by lenders include:
- Job loss
- Reduced hours or wages
- Decrease in self-employment earnings
- A need for extensive property repairs
- Mortgage payment increases
- Divorce
- Medical expenses
All of these scenarios open the doors for short sale and other foreclosure alternatives, but they must be detailed in a hardship letter. When writing a hardship letter, include all the information about the hardship and the inability to make payments.
In addition, write about the actions taken to mitigate the financial difficulties and the results of those efforts. Express the desire to avoid foreclosure and how the preferred alternatives will assist in keeping the home.
Along with the letter, attach any proof of the current financial situation, including bank statements and pay stubs. The letter will be included in the short sale package, increasing the chance that the lender will approve the offer.
The Seller Has No Assets
When financial difficulties lead to Chapter 7 bankruptcy, the courts will review all assets, including equity in the home. Assets they will take into consideration include:
- Retirement accounts
- Saving accounts
- Personal property
- Investments
Without any of these assets, the courts cannot seize property nor order the repayment of creditors. When that happens, the case will move forward as a no-assets bankruptcy.
With a no-assets bankruptcy, the doors open to allow a short sale of the home so homeowners can gain freedom from the loan repayment requirements, easing their financial stress even more. Lenders must have the no-asset bankruptcy documents on hand to approve action, however.
What If a Short Sale is Denied?
No matter the cause, in the end, whether a short sale goes through is up to the lender. However, even if the lender denied it once does not mean homeowners should not try again—regardless of how long a short sale can take. In fact, it is wise to continue trying until approval is granted.
Depending on the state, certain laws may prevent the resale of a home once a buyer is found; therefore, there are some things to check before trying the short sale again. Make sure to:
- Look over the paperwork to understand the terms
- Reach out to the buyer’s agent or title company
- Verify the contract has been canceled
All contract cancellations must occur in writing, providing tangible evidence that the agreement is void. The only exception is if the contract has expired.
After confirming the first contract is expired or void, review the hardship letter and resend to the lender. Then, include it as a part of the short sale package in hopes of approval the next time around.
In addition to these steps, it is important to know the main issues that can arise along the way. The following are several of the most common difficulties associated with short sales.
Buyer Offer is Too Low
If the buyer submits an offer that is too low, the lender will deny it, as they are looking to recoup as much of the loan as possible, minimizing their losses. Unfortunately, many lenders will not provide the minimum they are looking for, which leaves all parties of the transaction guessing on the lower threshold.
Without that knowledge, all homeowners can do is present the property in its best light with help from a real estate agent to increase bids as much as possible, which may improve the odds of lender approval. Then, the homeowner can accept the highest bids in hopes the lender finds the bid acceptable.
Excessive Cash/Promissory Note Demands from the Lender
If buyers do not offer enough funds to suit the lender’s needs, they may ask homeowners to contribute to the short sale. If additional funds are not available from the homeowners, the process may come to a standstill.
Lenders also ask for these contributions in other situations, such as:
- The property is not owner occupied
- The mortgage is not in default
- Owner’s income exceeds payment requirements
- The owner holds significant assets
It is possible to negotiate with the lender to find middle ground. A real estate agent can help in these negotiations, especially ones who are experienced in short sales.
The Buyer Walks Away
Short sales can take a long time to complete, potentially leading to the buyer walking away. If this happens, homeowners will have to start the process again, showing the residence and collecting offers. Homeowners can keep the short sale buyers from growing impatient by educating them on the process beforehand, making sure all ads indicate that the home is up for short sale, and provide a timeline to consider.
After accepting an offer and sending it to the lender for approval, the seller should stay in contact with other interested buyers, if any. If the first buyer walks away, the agent can reach out to other buyers to see if they want their original offer considered. Although this might not always pan out, it can improve their chances of putting in another offer for the lender’s consideration after the original buyer walks away.
Multiple Lien Holders Won’t Settle on Common Terms
When the home has multiple liens attached, it is not only the lender that has to approve the sale, as every last one of the lien holders must reach a mutual agreement to proceed. As the number of lien holders increases, the likelihood of reaching a mutual agreement decreases.
Homeowners can prevent delays by speaking with each lender to learn more about their requirements. Although some lenders might be less than forthcoming, the seller’s attempts should likely go a long way in reaching a resolution.
Once homeowners understand the minimum all lien holders are after, they can work in good faith to meet those objectives. Efforts could still fall short, however, depending on the state of the real estate market and total amount due across all liens.
Hire a New Agent
If multiple buyers walk away or have their offers denied, it may be time to hire a new agent. A new agent with a fresh perspective may help resolve the main barriers to success by using their experience in handling short sales.
A new agent may recommend refreshing the listing by taking several steps, including staging the home and taking new photos. With a new agent, homeowners might also get additional support in navigating the process, as most buyers are not familiar with the additional steps involved in purchasing a short sale. Their guidance can help decrease stress levels and improve decision-making skills while negotiating with buyers, lenders, and lien holders alike.
Review and Revise Your Hardship Letter
The hardship letter is the most important part of the equation when seeking lender approval for a short sale. This letter clearly spells out the financial hardships homeowners face along with their preferred ways of resolving the problem. If the lender repeatedly denies offers, then it is wise to review and revise the letter to make the situation more clear.
Review the letter and make sure that the hardship listed matches the cases accepted most often by lenders. The letter should be detailed to highlight the full scope of the situation and should indicate the outcome if interventions are not pursued.
Additionally, include all supporting paperwork possible as evidence of the claims. Pay stubs, bank statements, and other financial documents can inspire action by the lender.
Resubmit
Upon addressing all the above issues, the doors open for homeowners to resubmit any offers that come their way. The lender will use the hardship letter to assess the need for a short sale and weigh each offer. Lien holders will do the same, hopefully leading them all to the same page for a single offer.
Since most homeowners prefer a short sale over a foreclosure or another alternative such as a loan modification, it is likely lenders will provide approval once the key factors align. To succeed in a short sale, homeowners must stay the course, addressing any complicating factors as they arise. Real estate agents are an excellent asset to have through this process, as they bring immense skills and experience to the table.
Although short sales can be difficult to navigate, good faith efforts will go a long way in easing financial distress. If a lender denies the sale, homeowners can return to this guide to explore potential complications and solutions to find a way forward. It is possible for homeowners to remove barriers and resubmit with confidence.
For informational purposes only. Always consult with an attorney, tax, or financial advisor before proceeding with any real estate transaction.
