How and when to short sell your home
Lender requirements for short sells
- Your lender must approve a short sell.
- Short sale packages aim to convince lenders to allow a short sell.
- Most lenders require you to work with a real estate agent.
Life is unpredictable, as are real estate markets. Despite their best intentions, homeowners sometimes end up underwater on their mortgage — that is, owing more on the home than it is worth.
Being underwater is not an immediate problem if you can make you mortgage payments. If, however, you are unable to make monthly payments and are likely to be foreclosed on, short selling your home is an option to consider.
In a short sale, your lender agrees to let you sell your home at an amount less than what you own on your mortgage. The lender may waive the difference or require you to carry a promissory note to repay the amount in installments over a set term. You as the homeowner would not receive any income from a short sale, as the lender effectively takes on the role of the seller.
If you are facing foreclosure and considering a short sale, following are the steps to initiate the process.
Contact your lender
You must inform your lender’s loss mitigation department that you are considering a short sale, and complete a short sale package. As your lender is not obligated to agree to a short sale, the primary goal of this package is to convince the organization that it is in their interests to short sell rather than foreclose and auction your home.
Hire a specialist
Most lenders require that you hire a real estate agent to short sell your home and will typically cover the cost of the agent’s commission. It is essential that the real estate agent has extensive experience in closing short sales in your state.
Identify listing price
When you inform your lender of your intention to short sell, the lender will seek a broker price opinion. This is a third-party estimate of your home’s value and what price the lender can expect to get for it at auction. If the listing price does not satisfy a set minimum percentage of the broker price opinion, the lender may reject the short sale. Your real estate agent should request to be present when the broker visits the property to help ensure an accurate price.
Prepare the short sale package
In addition to listing price, the short sale package includes mortgage and other debt statements, W-2 forms, pay stubs, tax returns, bank statements, a seller’s disclosure on the condition of your home and neighborhood and a hardship letter. The hardship letter is the cover letter of your short sale package and is a written case asking your lender to approve the short sale. The letter should outline the financial arguments of why you are pursuing a short sale — such as a job loss, divorce or medical condition — and how they have affected your ability to make your mortgage payments. You should also demonstrate your efforts to rectify the situation and discuss why you believe you have no viable possibility of keeping up with your payments.
Identify the short sale terms
If your lender agrees to a short sale, be sure that you and your real estate agent are clear on the process and terms. The requirements for short selling depend on the loan type. Other important factors include whether the lender will forgive the balance lost in the sale or have you carry a promissory note, any taxes you may owe on a forgiven balance and closing fees.
Understand the impact on credit
Short selling eliminates any potential equity you have or could build in a home. If you can see trouble coming, contact your lender to discuss options. If possible, keep paying down the mortgage or take on minor renovations that could help your home appreciate in value. Refinancing your mortgage or negotiating a lower monthly payment with your lender could also ease your financial burden.
Another down side to short selling is the negative credit implications. How much a short sale will impact your credit depends on your initial credit score and whether you are delinquent on payments. The higher your initial credit score, the more of a hit your credit will take. In some circumstances, short selling can affect your credit just as severely as a foreclosure.
There are benefits to a short sale, however. You can qualify for a new mortgage after a short sale faster than a foreclosure, as your mortgage will be considered paid in full. While individual situations vary, borrowers typically become eligible for a new mortgage within three years following a short sale, while it can take up to seven years after a foreclosure.