The Complete Short Sale Process

Closing on a home
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The short sale process can be confusing to some home buyers and sellers. It can be difficult to explain how a short sale is originated, and the process of receiving approval from a lender can be lengthy.

A seller and home both need to meet certain criteria to be sold short. All information regarding the seller's finances and the home's value will need to be gathered and presented to the lender along with other items in a packet, as well as having a prospective buyer.

Defining a Short Sale

When a lender approves a short sale, they're agreeing to sell the property for less than the outstanding mortgage balance against it.

Lenders will generally only approve short sales when foreclosure appears to be inevitable. With a short sale, the lender doesn't have to take the property back and bear the expenses of maintaining it until it can be sold. They'll also avoid risking that the property won't sell again at a price high enough to recoup their losses—as it more than likely would in a foreclosure.

Foreclosure auction sales are generally much lower than the market value of a property. A short sale is a chance for a lender to receive more than it would have in a foreclosure—but they are not going to want to release any mortgage obligations at rock-bottom prices, either.

The Typical Process

This is the typical short sale process from the bank's end of things, once they receive the seller's package:

  • They acknowledge receipt of the file. This can take longer than 10 days; sometimes, it is a month or more.
  • A negotiator is assigned, which might take up to 30 days.
  • A broker price option (BPO) is ordered, where a broker generates an educated opinion on the value of the home. Banks generally will refuse to share the results of the BPO.
  • A second negotiator might be assigned, taking an additional 30 days.
  • The file is sent for review based on the pooling and services agreement. This can also take up to 30 days.
  • The bank might then request that all parties sign an "arm's-length" affidavit, which is a document signed by the buyer and seller stating that neither party knows the other, nor is there any type of pre-existing relationship between the two.
  • The bank will then issue a short sale approval letter if the sale is approved.

The Basics for the Seller

While there are more than a few requirements to qualify for a short sale, banks generally grant short sales for two reasons. One, the seller must be experiencing financial hardship and two, there isn't enough equity in the home to pay off the mortgage after closing costs.

Some examples of hardship include reduced income from unemployment, divorce, a medical emergency, bankruptcy, or the death of the sole income provider.

The seller must prepare a financial package for submission to the short sale bank. Each bank has its own guidelines, but the procedure is similar from bank to bank.

The Seller's Package

A seller's short sale package will most likely consist of:

  • A letter of authorization for your agent to speak with the bank.
  • A preliminary closing statement.
  • A completed financial statement or request for mortgage assistance (RMA).
  • A hardship letter from the seller.
  • Tax returns for the previous two years.
  • W-2s for the previous two years.
  • Payroll stubs for the last 30 days.
  • Two months of bank statements.
  • A comparative market analysis or list of recent comparable sales in the area.

Writing an Offer and Submitting It to the Bank

As a buyer, ask your agent for a list of comparable sales before you write a short sale offer. The bank will want to receive an offer as close to the amount owed as possible.

The short sale listing price might not reflect market value. In fact, the property might be priced below comparable sales in an effort to encourage multiple offers. Some short sales can begin prior to an offer but banks will most often start the procedure upon receipt of an accepted purchase offer.

After the seller accepts the offer, the listing agent will send the listing agreement, the executed purchase offer, the buyer's preapproval letter, a copy of the earnest money check, and proof of funds to the bank. They'll also submit the seller's short sale package.

The short sale process will be delayed if the package is incomplete. They may not send it back to you, attempting to reduce as much of the cost for themselves as possible.

The Bank

Buyers might wait a long time to get a short sale response from a bank. It's important that the listing agent call the bank regularly and keep careful notes of the progress.

Some short sales get approval in two to eight weeks. Others can take 90 to 120 days on average. A top short sale agent can help to speed up the process a little by keeping informed of the offer's progress and holding the bank accountable.

Checking in with the bank at least once or twice a week is imperative. Recognizing the behavior of incompetent negotiators and requesting a replacement is often necessary as well. Never be afraid to advocate for yourself, or escalate your actions up the management chain of the bank.

Some Final Tips

Buyers might become tired of waiting for short sale approval and threaten to back out if they don't get an answer within a specified time period. The process can be frustrating—both buyer and seller agents may need to work to reassure the buyer and seller that patience is necessary, as the wait can be lengthy.

A listing agent will often have some idea of when approval will arrive as the file is sent for final review. At that point, buyers might want to start the loan process and other due diligence so they've got a head start in case the bank allows only a few weeks to close.