Have you heard the term short sale and wondered what it really means? Well, a short sale is when a Seller’s lender agrees to let the property be sold for an amount that is short of the payoff amount of the Seller’s loan without requiring the Seller to pay the difference owed to the lender at close of escrow. Here are some of the factors that determine eligibility of a borrower for a short sale. At least these are some of the “rules” as we know them today. The rules for short sales seem to be changing daily and what one lender allows may not be acceptable to another lender and what works in one state may not be acceptable in another state.
Typically, the property involved has to be owner occupied and the Seller needs to have experienced a hardship. The hardship could be due to a loss of job, health issues, family issues, death, divorce, etc. There needs to be a legitimate reason why the owners are not able to afford their loan payments any longer. It also means that the borrower doesn’t have other assets that can be used, although some types of retirement accounts are excluded. In some cases the hardship could be caused by an increase in the monthly loan payments caused by an Adjustable Rate Mortgage (ARM). There were ARMs that were available five to seven years ago that had an interest rate lower than the fixed rate loans available at the time. Depending on the terms of the ARM the interest rate and payment would adjust in five years or seven years to a higher interest rate and the monthly payment would adjust accordingly. Many borrowers who obtained these ARMs planned to refinance their homes prior to the loan adjusting in five years or seven years. The problem is that the current value of the borrower’s home is less than the outstanding balance of the loan. So it isn’t possible to refinance to a better rate or to sell without bringing cash to the closing table. Unless, that is, the lender allows the sale in an amount short of the amount of the loan balance That’s why it’s called a Short Sale.
Following are some of the documents that your lender is likely to require in a hardship package. Typically the lender is looking for a one page hardship letter describing why you are asking for a short sale on your property, bank statements, tax returns, and thorough Financial Statement. Each lender has their own documents. Generally a lender will not approve a short sale until there is a potential purchaser who has submitted an Offer. Many times you can go to your lender’s website and find out exactly what they require.
In my next blog I’ll let you know what is likely to happen then.