What Is The Process Of A Short Sale?
Today, we’re diving into the short sale process. If you’re an agent, an investor, or a homeowner trying to navigate this process, this guide will walk you through each step from start to finish.
Understanding a Short Sale
First, let’s define what a short sale is. A short sale occurs when a homeowner faces financial hardship—such as a job loss, medical expenses, or divorce—and needs to sell their home. However, the homeowner owes more on the mortgage than the home is worth. In a short sale, the lender agrees to accept less than the owed amount, allowing the homeowner to sell the property without having to cover the deficit.
The Short Sale Process
Step 1: Identify the Need for a Short Sale
Determine if the homeowner is a candidate for a short sale. This involves assessing their financial hardship and understanding that they owe more than the home’s current value.
Get all required documents signed by the seller at the outset. This includes the listing agreement and the short sale packet. Sending a complete package to the bank from the start will save time and reduce back-and-forth communication.
Step 2: Submit the Short Sale Packet
Submit a complete short sale packet to the lender. This packet includes all financial documents, hardship letters, and other necessary forms. Proactively sending all required documents can significantly cut down processing time.
Consistently follow up with the lender every two to three days. Banks are not known for their prompt communication, so being proactive ensures you stay ahead in the process and quickly address any missing documents or issues.
Step 3: Lender Reviews Financials and Acceptance
The lender will review the seller’s financial situation and hardship. They are not concerned with the offer at this stage but focus on approving the seller’s hardship claim. Ensure all financial documents, including pay stubs, bank statements, and tax returns, are complete and accurate.
Once the seller’s hardship is approved, the lender orders an appraisal to determine the home’s “as is” value. This appraisal sets the stage for the next steps in the negotiation.
Based on the appraisal, the lender will specify the minimum amount they are willing to accept. This is typically a percentage of the appraised value, such as 88% for FHA loans. This approved price is critical for listing the property.
Step 4: List the Property
List the property at the approved price. Avoid listing it before obtaining the lender’s approved price to prevent complications with potential buyers and ensure a smoother process.
Negotiate any additional liens or judgments on the property, such as HOA fees, second mortgages, or tax liens. All these must be included in the HUD-1 Settlement Statement, and each lienholder must agree in writing to take a reduced payoff.
Step 5: Obtain Short Sale Approval
Once all negotiations are complete, obtain the short sale approval letter from the lender. This letter will outline the terms of the sale, including the approved buyer, purchase price, and closing date.
Make sure all parties adhere to the terms in the approval letter. The transaction must close by the specified date, and no changes to the buyer or terms can be made without lender reapproval.
Step 6: Finalize the Sale
Ensure that all lienholders have provided written approval for their reduced payoff amounts. Once all approvals are in place, proceed to close the sale, adhering strictly to the terms outlined in the short sale approval letter.
Obviously, this can go a million different ways, but these are the fundamental things that have to happen in order for you to be able to close the short sale process. Until next time!
