How to Qualify for a Short Sale: Maximize Your Success With These Guidelines
Short sales are an important option for homeowners in financial distress. For homeowners who are underwater on their mortgage and who can no longer afford to make mortgage payments, the short sale process is a way to avoid foreclosure and stay in control of the home sale process.
Not all short sales are approved. A homeowner must meet certain requirements in order for the lender to agree to a short sale. If you're a homeowner who would like to sell your home as a short sale, it's important to understand what qualifies you for a short sale and what you need to do in order to be approved. By submitting the proper short sale package and describing your financial situation to your bank as thoroughly as possible, the application may be accepted. It's also important to work with a capable real estate professional. Getting professional help from someone with knowledge can help make the transaction easier overall.
Qualifying for a Short Sale
Short sales occur when the homeowner owes more money toward their mortgage than the market value of their home. Homeowners who can't afford to pay off the difference between the mortgage and the amount the house sells for must get special permission from the lender to sell the home.
Short sales are an alternative to foreclosure, and many banks prefer a short sale to a foreclosure. However, most banks will not approve a short sale unless they can be convinced that the short sale is a necessary step to avoid foreclosure. In order for this to happen, the homeowner must meet the bank's qualifications.
The Home's Market Value Has Dropped
Most of the time, home values go up (not down). However, there are many factors that can cause the market value of the home to drop. Some examples of factors that can affect the market value of a home are listed below.
When the economy in a community takes a dramatic downturn, this can cause home prices to drop. As people in the community become unemployed or under employed, wages begin to drop, and the measure of what is an "affordable" home begins to change. To accommodate this change, home prices get lower and lower so homes may continue to sell.
Sometimes, a natural disaster, like a wildfire, can cause the environment around the house to change, which can in turn affect the home's value. Environmental hazards, like a poisoning of local water, can have this same effect.
If the homeowner stops taking care of their house, the resulting structural or cosmetic damage can reduce the home's value. This often happens when the homeowner goes into financial distress.
Surrounding Foreclosures and Short Sales
Foreclosures and short sales in the neighborhood can lead to a decline in home values because home buyers are reluctant to purchase in a neighborhood where residents have financial instability. Instability in the neighborhood leads to uncertainty, which can deter buyers.
If many businesses in the area suddenly go out of business or leave, home prices may fall. This is because home buyers want to buy in locations that are accessible to services and jobs.
The value of the home is proved with documentation known as the comparative market analysis, wherein a real estate agent compares the value of the home to other homes in the area. The comparative market analysis is a standard report that most lenders expect to see when a home buyer is asking for short sale approval.
The Mortgage is In or Near Default Status
Homeowners must maintain their home in order to be in good standing with their mortgage company. There are many ways that a homeowner can default, including:
- Failure to pay property taxes
- Failure to pay homeowners insurance
- Failure to pay the mortgage itself
If the homeowner fails to make payments to the mortgage, the lender is more likely to allow the home to be sold as a short sale. However, defaulting on the mortgage can have a significant impact on the homeowner's credit. Homeowners who can be approved for a short sale without defaulting on their mortgage should do so.
When turning in a short sale application, the homeowner should submit any documentation that shows that they have defaulted on the mortgage, even if they believe the lender has this information on hand already.
Seller Has Fallen on Hard Times
Financial hardship because of an involuntary reduction of income or an unavoidable increase in expenses can be a qualifying factor that would enable a short sale to be approved by a lender. Financial hardship must be outlined in the hardship letter that is sent to the lender. Generally speaking, the most convincing financial hardship is hardship that the home buyer had no control over. For example, loss of a job due to widespread layoffs is a much more sympathetic situation than being fired for failure to show up on time.
The following tips can help the homeowner write a hardship letter:
- Keep the hardship letter short and simple.
- Do not include information that could make the lender believe that the homeowner's hardship is due to the homeowner's own fault.
- Do not mention if the situation is likely to improve.
The Seller Has No Assets
Lack of financial assets helps prove the homeowner is unable to pull themselves out of their financial situation. The lender will expect to see proof of financial assets (or lack thereof), including savings accounts, IRAs, and other real estate. Some assets may not completely prevent a homeowner from being able to sell their home, but the type of assets they have and how much they have will be taken into consideration.
What If Your Short Sale is Denied?
Denial of an application to sell a home as a short sale does not mean that the homeowner can't apply again. Sometimes short sales are denied because the homeowner doesn't present enough information or make their case as thoroughly as possible to the mortgage lender. Working with their real estate professional, the homeowner can build a stronger case before trying again.
This is why it's important to keep a copy of all documentation submitted to the bank. Having a copy of what was submitted to the bank makes it easier to review the documents and make changes or additions as needed. Homeowners who already have a signed contract with a home buyer must ensure that the contract is canceled.
Most home purchase contracts for short sales include a requirement that the contract must also be accepted by the lender, and if it is not accepted in a certain period, the contract is canceled. Homeowners can work with the title company to ensure that the contract is indeed canceled. Below are some of the many reasons that a short sale application may be denied by the lender.
The Buyer Offer is Too Low
Although banks may prefer short sales to losing money in a foreclosure, banks do not want to accept offers that are just too low for the value of the house. The homeowner should take into consideration the market value of the home when trying to decide which offer to accept. Working with an experienced real estate professional can help.
A real estate professional who has helped homeowners with many short sales in the past will be able to help the homeowner decide which deals are most likely to be accepted by the lender.
Although it may be tempting to accept the first home purchase offer that comes through, it's better to wait for an offer that is likely to be accepted by the bank. The higher, the better. Homeowners should consider the comparative market analysis for the house when trying to make this determination.
Excessive Cash/Promissory Note Demands from the Lender
Sometimes the lender asks the homeowner to contribute cash toward the mortgage, even if the homeowner feels they have no cash to contribute. Sometimes lenders do this when they believe that the homeowner has assets that can be contributed toward the value of the loan, while other times lenders do this if the homeowner is unable to make a strong case about their financial hardship.
Usually, real estate professionals can help homeowners negotiate with their lender, either to have the cash request reduced or to have the cash request fully eliminated.
The Buyer Walks Away
Buyers must display a lot of patience throughout the long short sale purchase process. Banks can take weeks or even months to respond to a homebuyer's offer, and some banks do not respond at all.
Homeowners who want to keep the process moving may send along subsequent offers to the lender, even if the first offer has not been accepted or denied by the lender. Homeowners may forward subsequent offers to the lender even if the homeowner has already signed an agreement with the first home buyer. If the buyer does walk away, the lender will have other offers to consider.
One of the ways to avoid a situation wherein a buyer walks away is to submit a thorough package to the lender. The stronger the case the homebuyer makes to sell the home as a short sale, the more likely it is that the lender will accept the offer. It's also important for the homeowner to send along a strong offer, if a strong offer is available.
Multiple Lien Holders Won't Settle on Common Terms
Often, people who are trying to sell their home as a short sale are in enough financial distress that there are one or more liens on their home. All lien holders must agree to a settlement in order for the short sale to proceed. If the lien holders won't settle or cooperate to reach an agreement, then the short sale cannot be approved.
Working with an experienced real estate professional can help. By presenting a strong short sale application, sometimes all lien holders can be brought together in one agreement.
Hire a New Agent
Working with an experience real estate professional is so important that if the homeowner chooses the wrong professional, sometimes the only way to get past the problem is to hire a new agent and start again. When looking for a real estate professional, the homeowner should ask questions such as:
- How many homeowners have you helped with short sales in the past?
- What advice would you give to a homeowner who is trying to sell their home as a short sale?
- What can you do to help the sale of this home go through?
By taking new pictures and re-listing the home, the homeowner can also bring in fresh buyers, which could in turn make the short sale a success in the future.
Review and Revise Your Hardship Letter
Sometimes it is the hardship letter that does not make a good case for the short sale. Reviewing and revising the hardship letter to include more examples of hardship and more supporting documentation can help. Writing a hardship letter is an art, and not all homeowners are comfortable writing their own letters of hardship.
Some homeowners are tempted to present a hopeful picture that makes it sound like their financial situation could improve. Other homeowners simply don't make their case in the clearest way. A good real estate professional can help the homeowner make their case by reviewing the hardship letter and making suggestions. This is another reason to work with an experienced real estate agent.
After reviewing and revising the application to make a stronger case for a short sale, and after finding a new home buyer (hopefully one who is able to make a better offer), the homeowner may resubmit their application to the lender. Again, it's important to work with an experienced real estate professional before resubmitting the application.
A good real estate professional will know what the lenders are looking for, and will be able to catch errors and problems more easily. The stronger the application is when it is submitted, the more likely it is that the lender will accept the application.
Contact an Experienced Real Estate Professional Today
Even if a short sale application isn't accepted the first time, it may always be accepted the next time around. Making a stronger case, working with a capable real estate agent, and learning from the mistakes of the past can help. If you're a homeowner who would like to sell your home as a short sale and you're not sure where to get started, or if you're a homeowner who has recently had your application for a short sale rejected, contact a reputable real estate professional today.