A short sale in real estate occurs when a homeowner who owes more on their mortgage than their house is currently worth agrees to sell it for a price less than the fair market price. When short sales started creeping back into real estate sales in 2005, many sellers asked how they could make money from a short sale. The popular belief was that sellers couldn't profit from a short sale. However, there are actually a few ways that sellers can get paid to do a short sale. Not all of them are legal, though, so it's important to do your homework.
Let's look at a few of the options that have been available for sellers to get cash back in a short sale. Not all of these are still available, but it gives you an idea of the programs you can look for and how to qualify.
Make Sure the Offer Is Legitimate
Before you go looking just anywhere for a chance to make money on a short sale, be sure you know how to find legitimate opportunities.
If you're in doubt about whether a payment to you is legal, make sure the payment you receive is reflected on your closing disclosure (formerly the HUD-1). Most sellers get into trouble with short sale fraud by deceiving a lender or withholding information from a lender. As long as the money you receive is noted on the closing disclosure, then you're relatively safe.
A short sale can be complicated, and even more so if you have a line of credit, home equity loan, or other liens against your home. Consult a legal and tax advisor about what a short sale means for you.
Getting Cash for a HAFA Short Sale
The best-known cash incentive program for a short sale was a HAFA short sale, which ended in December 2016. This was a government program, Home Affordable Foreclosure Alternatives, part of former President Obama's Making Home Affordable Program.
If your lender participated in HAFA and you qualified for HAFA to purchase a short sale, then you could have received up to $3,000 at closing. The rules for a Fannie Mae HAFA short sale were different. These paid up to $3,000 to the seller, as well, provided the transaction made it to the short sale closing and beat the foreclosure deadline.
It was also possible to get $3,000 through a Freddie Mac HAFA short sale, but this type of short sale required preapproval in advance.
How to Get Cash for an FHA Short Sale
If you have an FHA loan, you might qualify for an FHA short sale. FHA short sales are known as preforeclosure sales, and they are typically preapproved by HUD. The bank will appraise your home and agree to do a short sale provided you receive an offer that nets HUD a minimum of 88% of appraised value.
The cash incentive paid to a seller varies and depends on the following, among other factors:
- The type of loan
- The seller's financial situation
- The guidelines inherent in the portfolio
These cash incentives for sellers often range from $750 to $1,000, but that doesn't mean a seller can't receive more (up to $3,000).
Agreeing to leave the home in good condition and closing on time are usually the two main requirements to secure your cash payment in a short sale.
Examples of Bank Incentives for Short Sales
During the recovery from the 2008 mortgage crisis, many banks offered cash incentives to assist sellers in making short sales. There were reports of banks like Chase and Wells Fargo offering $10,000 or even $20,000 to desperate buyers who were behind on their mortgages.
Some sellers in San Diego reported being offered $35,000 by one bank to do a short sale. These sellers didn't even necessarily seek out a short sale—many received letters from their banks with the cash offer and instructions for the next steps.
Bank of America still offers a smaller-scale program to its customers. Out of all the banks that approve short sales, Bank of America is one of the best for implementing innovative systems. Its Cooperative Short Sale pays sellers up to $3,000 to do a short sale and, in most instances, requires only a financial hardship letter.
The Bottom Line
If you're a homeowner, you never hope to end up making a short sale on your home. But sometimes circumstances put you in that position, and it's important to make the best of it. If you're struggling to keep up with your mortgage payments, be sure you reach out to your lender and explore your options before you fall too far behind.