Frequently Asked Questions
Short Sale Listings
Short Sale Approval
Making an Offer for a Short Sale Property
Other Impediments to a Short Sale
Short Sale Contracts
What is a short sale?
A short sale occurs when a property is sold at a price lower than the amount the homeowner owes on the mortgage, and the homeowner's mortgage lender(s) agrees to the "short" payoff. A lender might accept a short sale with the property worth less than the balance of the mortgage, if the borrower cannot continue to make the monthly loan payment, does not have enough money to pay back the full balance of loan and needs to move out of the property.
Is the mortgage lender’s approval necessary in a short sale?
Yes, because in a short sale, the mortgage lender will be receiving less than amount the borrower owes on the mortgage. The lender needs to verify that the homeowner cannot continue to pay the mortgage and determine if a short sale is better than foreclosing on the property.
Why do homeowners sell their homes through a short sale?
Homeowners pursue a short sale when they can no longer pay the mortgage, need to move from the property and want to avoid a foreclosure. With a short sale, the impact on the homeowner's credit record might not be as bad as a foreclosure in some circumstances.
Who benefits from a short sale and how do they benefit?
What are the pitfalls of buying a short sale property?
If the seller is selling a property for less than what they bought it for, does that mean the buyer instantly earns equity on the property?
Not necessarily. The seller could have bought the home at a time when property values were high, possibly in a booming market. Today, the housing market is down and the value of many properties has declined. If a buyer purchases a short sale property at a price that is lower than what the property is appraised for in today’s market, then the buyer enjoys a discount and picks up some equity. However, in today’s market most short sale prices are close to comparable retail sales.
Why does the short sale purchase process usually take longer that a regular purchase?
The seller's mortgage lender needs to thoroughly review a seller's short sale request. Gathering the required documentation and doing bottom-line reviews can take significant time to complete before a short sale is approved. Also difficult negotiations that take place between the parties involved, such as junior-lien holders and the seller, may delay the process.
Can I complete a short sale purchase transaction on my own?
Because of the complex nature of a short sale transaction, it is strongly recommended that buyers work with a real estate professional who has a track record in successful short sales. With the experience and connections, such an agent should be able to identify and help resolve possible hurdles, help put together a viable offer, protect the buyer’s interests, and negotiate the best deal.
How can I find properties that are being sold on a short sale?
Buyers can use an online database, such as a Multiple Listing Service, or consult real estate professionals who have experience in short sale transactions. Aside from "short sale," some key phrases to look for are "subject to bank approval," "preforeclosure," "third-party review required," and "pre-approved by bank" which may indicate that the property is being sold on a short sale.
"Approved for short sale" means the bank has already determined that the homeowner qualifies for a short sale and has approved the request to sell the property at a reduced price. It is possible that an earlier buyer made an offer that was approved, but did not close the transaction. Making an appropriate and timely offer on an "approved for short sale" listing may be a quicker process because the seller no longer needs to be qualified.
"Third-party review required" means the homeowner has not sought approval yet from his/her lender to do a short sale or approval is pending review of the homeowner’s application. This means the process could take longer. Plus there is a risk that the homeowner will not qualify for a short sale in which case the property will need to be sold at a higher price.
What are the reasons the mortgage lender will not approve a short sale?
A settlement statement, also known as a "HUD-1," shows how the money from the sale is distributed to all of the participants in a real estate sale. Before the seller's mortgage lender approves a short sale, it will look at the proposed settlement statement to review the following:
These items provide the lender an idea of the buyer’s capability to purchase the property and the extent of the lender’s loss if it approves the short sale with the buyer’s price offer.
Like buying any property, to increase a buyer’s chances of success, the offer needs to be competitive. In the case of a short sale, the offer may need to be closer to the market value of the property rather than the list price. Short sale listings are often priced low for the purpose of attracting multiple offers. But this doesn’t mean the property will sell at that listed price. Note that most banks will not evaluate the seller’s request for a short sale until there is an offer on the table.
The property’s market value can easily be gauged by looking at comparable homes that have sold in the area recently. In today's improving market, short sale prices have risen dramatically. An experienced real estate agent will provide the best advice about how to negotiate a reasonable sales price.
Should I start with a lowball offer in case bidding or negotiations occur?
The seller's mortgage lender will check property values in the area so a lowball offer is not recommended. Many banks are so overwhelmed with short sale requests and multiple offers that they will most likely not even counter-offer if you submit a lowball.
What should be included when an offer is submitted?
What are the reasons the mortgage lender would reject an offer?
The most common reason is simply that the offer price is too low. If the short sale will make the lender take a bigger loss than foreclosure, the lender will usually have to foreclose. Both the seller and the buyer need to make sure the sale makes sense for everyone, not just the seller. Other reasons include:
Note that it is not uncommon for the lender to respond with a counteroffer. As with any real estate transaction, buyers will need to know beforehand what their limits are so they can either accept the counteroffer or walk away.
How can I increase the chances of my offer being accepted?
Short sale buyers, with the help of an experienced real estate professional, may increase their chances of success if they:
Should I start shopping for a lender even if the property I am interested in has not been approved for short sale?
Yes. In evaluating a buyer’s offer, the seller’s mortgage lender will consider the buyer’s ability to purchase the property. Ironically, after a long wait for the lender’s approval, buyers are also expected to move quickly to close the deal. It is therefore recommended that buyers work with a reputable and flexible lender and secure pre-approval for financing by the time an offer is submitted.
Why does a short sale become more difficult when there are more lenders involved?
A short sale can only happen when all lien holders on the property agree to the short sale. Lenders holding second mortgages on the property (such as home equity lines of credit or piggyback loans) are also taking a loss on the sale. They will want to receive a certain amount from whatever is left after all costs are paid. Often, there will not be enough funds left to payoff junior lien holders. Here is where the delays and negotiations take place.
If the loan was sold to an investor, such as Freddie Mac or Fannie Mae, the investor will have to approve the short sale. Investors will have their own requirements and review process before they approve a short sale.
Yes, when a seller is uncooperative and slow to gather/submit the required documentation, this may stall the review process. This sometimes happens when sellers – who know that a short sale can adversely impact their finances – are reluctant to give up their homes. They may have very little motivation to cooperate.
Also, sellers may be required by one of the lenders to make a payment, usually called a “contribution”, at closing to help reduce the lenders losses. Some sellers wait until the last minute and then refuse to make the contribution or think that the buyer will make it for them. When this happens, the short sale is not approved and will not close. The seller has to understand up front that he/she is receiving a financial windfall and a small payment to reduce the lender’s losses is expected.
What is a short sale addendum?
A short sale addendum is a critical document in many short sale transactions because it provides the details regarding some of the following:
It is important to work with a real estate professional with experience in short sale transactions to ensure the short sale addendum includes the items that will protect the buyer’s interests during the short sale review and execution process.
Yes, a seller may cancel the short sale contract because:
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