A short sale, which can also be referred to as a pre-foreclosure sale, is a method of selling your home because you can no longer afford mortgage payments, and want to avoid foreclosure.
In a short sale the lender will agree, due to proof of hardship and inability to pay back the mortgage, to sell the home for under or close to the remaining mortgage balance.
What you need to know as a seller in a short sale
First and foremost your mortgage lender needs to approve the short sale. Just because you decide you can’t or don’t want to make payments anymore doesn’t mean you can enact a short sale agreement. In a short sale, you as the seller never get any money related to the sale.
If you find that meeting monthly mortgage payments have become hard, for whatever reason, you can first try modifying your loan agreement. Talk to your lender and see if there are options for lower monthly payments, temporary freezes while you get back on track, or making interest-only payments for a time being. If the situation is dire, and you want to avoid foreclosure, explain the circumstances to your lender and see if a short sale is an option.
Some value to a short sale is that you repair your credit score sooner than if you were to foreclose, and you may be able to get a new mortgage loan in as little as two years, compared to at least seven if you foreclose.
When you contact your mortgage company, you will need to have some documents on hand, including:
Monthly debt payments (i.e. student loan, car, and/or credit card bills)
Most recent pay stubs
Tax returns from the past two years
Settlement statement (HUD-1)
Your lender will probably ask for additional documents as well.
If you are approved for a short sale, get a real estate agent that is knowledgeable in short sales, as these are trickier than typical sales and a little experience goes a long way. Furthermore, it is advised to consult with an accountant and attorney as well, who should also be well-versed in loss mitigation.
To reiterate: It is up to the lender whether or not you can perform a short sale. They may feel that they will get more money from having you foreclose on your house, and it is within their right to take that option.
And remember that short-selling isn’t your only option: You can work with your bank or mortgage lender, or even the federal government, to avoid losing your home.
What you should know before considering buying a short sale home
“Buyer beware” is a very apropos piece of advice when considering entering into a short sale situation. You may think that a short sale is a good way to get a home on the cheap, but it takes a lot of work and patience to get the deal to go through.
Make sure you hire a real estate agent that is very experienced in short sales. Most importantly, make sure the property is actually short sale approved by the lender. Do extensive research on the property. If there is a second mortgage on the home, this could present more problems than you want to deal with, since the primary lender will have to pay off the junior lender.
Once the seller has accepted your offer, send it to the mortgage lender for approval. The deal isn’t final until the lender accepts. Along with the offer, send a copy of your earnest money deposit. This is a deposit showing your sincere intentions of purchasing the property. You should also be preapproved for a loan by this time. Complete your deal package to the lender by including a preapproval letter as well.
Then get ready to wait. A lender can take as long as they want to give you an answer, and don’t be surprised if they reject your offer or ask for a higher amount. While you are waiting for a bank response keep looking around, and if you find another home for a comparable price that you can buy from a seller directly, do it.
Make sure you also do inspections on the short sale home. The lender will not offer you this service. However, be warned, a bank can still collect offers on the property even when it’s in escrow. You could pay for home inspections and title inspections and they can still decide not to take your offer.
A final note of caution: watch out for fraud. A seller in a short sale agreement isn’t allowed to collect any money, but an unscrupulous one may try to leverage extra money from you without the bank’s knowledge, claiming it’s to ensure the deal goes through. This is illegal, and should be reported immediately.