A short sale occurs when you sell your home for less than what you still owe on your mortgage. It can prevent you from seeing your home foreclosed and undergoing bankruptcy. However, your mortgage lender must approve the short sale. The process can also be complex and risky. As you consider whether or not a short sale is for you, you might do well to work with a financial advisor who can help guide you through the process.
How to Qualify for a Short Sale
Before you can initiate a short sale, you must meet the following conditions:
- You must be substantially behind on mortgage payments to the point where you’re not expected to keep up.
- Your home must be worth less than the remaining balance on your mortgage.
If you find yourself in these situations, you can contact your mortgage lender to discuss a potential short sale. If the lender agrees to move forward, you can work with a real estate agent to put your home back on the market.
But keep in mind that your lender must approve of all short sale details. This means the bank can deny your petition to short sale. It can also change its mind in the middle of the process. This may be the case even if you find a potential home buyer who agrees to your terms.
Still, most lenders would prefer to work out a short sale than go through the lengthy legal process of foreclosure. In the latter situation, you’d likely be evicted from your home, and the lender will try to sell it. You’d also have to wait at least seven years before you can take out a new mortgage, and your credit score will take a hit.
How the Short Sale Process Works
Before you get in touch with your lender, you should gather financial documents to prove you deserve a short sale. Different banks have their own rules. If you have a VA or FHA loan, you might have to provide additional information. Normally, though, a short sale package must include the following items:
- A letter of authorization giving your lender permission to discuss your loan terms with a lawyer, your real estate agent, the bank and anyone else involved
- Tax forms from the past two years
- Bank statements from the last two months
- Pay stubs from the past month or a letter if you don’t have a job
- A hardship letter with details about why you can’t keep up with mortgage payments
- Proof of assets like investment accounts
- A market analysis that estimates your home’s market value and compares it to similar properties that have been sold within the past six months
- A preliminary net sheet listing all the costs associated with the transaction, such as the home sale price and the total amount of the loan that hasn’t been paid
- A listing agreement that shows when your house went on sale, how long it’ll be listed and how much you paid whoever listed it
After your lender agrees to move forward, you should find an experienced real estate agent who can help you sell your home. Together, you and your agent will decide on a home sale price and officially put the home on the market.
You’ll have to think about how long you want to list your property for. Is 30 days enough time or should your home be on sale for six months or a year? The agent or company who listed your home will receive commission for their services, so you’ll need to figure out how much you’re willing to pay them.
Next, you’ll sift through the offers you’ve received from buyers.
A strong candidate will be willing to wait until the lengthy process is complete. In addition, this person will have a mortgage pre-approval letter, proof that he or she can afford your house and an earnest money deposit high enough to suggest that he or she is seriously considering your home.
Once you’ve found a homebuyer, you’ll fill out a purchase contract that explains when you’ll turn your home over to the buyer and when you’ll complete inspections and other paperwork. After that you’ll be ready to submit your package to the bank.
How Lenders Evaluate Short Sale Applications
Once a lender receives a seller’s package, one or two people usually work on the short sale. A broker provides her opinion on what the home is worth, and then all parties review the entire application.
Everyone involved may be required to complete an agreement saying that there aren’t any conflicts of interest and the seller won’t take back the home after all is said and done. If the bank is happy (and no one backs out of the transaction), it’ll grant the short sale.
How a Short Sale Can Affect Your Credit Score
Both foreclosures and short sales can show up as negative marks on credit reports. And sometimes credit bureaus don’t have a system in place that distinguishes the two.
But if you send documentation to the credit reporting agencies proving that you went through a short sale rather than a foreclosure, your credit score could take less of a hit. Homeowners who have gone through foreclosure often have to wait seven years before they can qualify for another home loan. People who’ve gone through a short sale may only have to wait two years before they’re eligible for a mortgage.
Buying a Short Sale Home
From a buyer’s perspective, purchasing a short sale house could seem like a great idea. Short sale homes are generally less expensive than other houses and a short sale property is likely to be in a better state than a home that has gone into foreclosure.
Trying to buy a short sale house, though, could be more trouble than it’s worth. It could take months for a bank to sign off on a short sale. And in the end, the bank could refuse to approve a short sale if it thinks the selling price is too low.
Short sales give homeowners with underwater mortgages the opportunity to avoid foreclosure and keep their credit scores from destruction. Banks end up with less money than they’re owed, but benefit from potentially keeping more money in their pockets than they would through a foreclosure.
For sellers, short sales are often long and complex transactions that can last for as many as 120 days. As an alternative, you could modify your existing mortgage through the government’s Home Affordable Modification Program (HAMP).
Tips on Debt Management
- Most people turn to short sales after falling behind on their mortgage payments. However, you can take several steps to clean up your finances and credit score. You can use our free budget calculator to get started on something you can stick to. We also published a report on the five fastest ways to improve your credit score.
- Securing a short sale can be difficult, but the process is typically much easier for people who improve their credit reports. If you’d like some professional guidance on achieving this, you can use our financial advisor matching tool. It connects you with up to three financial advisors in your area who can help. It also provides you with access to their profiles. You can review their credentials before choosing one to work with.
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