WHAT IS A FORECLOSURE?
A foreclosure can occur when the lien holder takes legal action to recover the property and / or balance due on a mortgage loan. Here is how it works. When a buyer purchases a home with a loan, they are known as borrowers and the lending institution is known as the lien holder or mortgage company. By accepting a mortgage loan to purchase the home, the buyer(s) and lender(s) agree that a lien will be placed on the property making this a secured loan. In the event that the borrower(s) is unable to pay back the loan, the lien holder has the right to recover their losses by foreclosing on the property. The actual foreclosure process may vary from state to state. A short sale is a meaningful alternative to the foreclosure process.
WHAT IS A SHORT SALE?
A short sale occurs when a property sells for a price that is insufficient to pay back the loan(s) secured against it (or any other liens against the property, such as delinquent property taxes, Homeowners/Condominium Association Fees, etc.) as well as standard sales closing costs. In such a case, in order to complete the sale, you, as a Seller, must either: (1) come to the closing with sufficient cash from other sources to cover the shortfalls; or, (2) your lender(s) must agree to forgive all or a portion of the amounts you are “short” or make other arrangements for repayment (such as execution of a promissory note). This second alternative is commonly known as a Short Sale. Your lender will generally not allow you to receive any proceeds or otherwise obtain any monetary benefit as part of a Short Sale. However, you may qualify for a homeowner incentive as approved by the lender.
WHAT IS THE PROCESS FOR GETTING A SHORT SALE APPROVED?
There is no universal set of rules or regulations that determine whether you are eligible for a Short Sale or whether your lender(s) will approve a Short Sale. Each lender is different and each has established their own criteria, which may or may not be available to you. Some lenders will not communicate with anyone but you regarding a possible Short Sale, and others may not discuss the possibility of a Short Sale unless you are in default, or until a contract offer is presented. The basic general steps in the Short Sale process after listing the property for sale are:
Proving Financial Hardship: You must typically prove to your lender(s) that you are experiencing financial hardship and will be unable to continue making loan payments. In some, but not all cases, you may already be in default of your payment obligations. Most lenders will require you to provide specific information such as a financial affidavit, tax returns, bank statements, and pay stubs in order to prove financial hardship.
Determining Property Value: Once you have proven a financial hardship, the next step is to demonstrate that the property is worth less than the total amount owed to your lender and any other lien holders. Your lender will require a Broker’s Price Opinion (BPO) or Comparative Market Analysis (CMA) from a real estate agent. They may also order an appraisal of the Property from a licensed appraiser of their choosing.
Finding a Buyer: A qualified buyer must submit an offer to purchase the property, which is then submitted to the lender for approval. Each lender with a mortgage or lien against the Property must approve of the potential purchase to the extent that their loans will not be paid in full at closing. Many lenders will not even consider a Short Sale, review the Property’s value or evaluate your financial hardship until a bona fide offer to purchase is received.
Receiving Final Approval: Once your lender acknowledges your inability to continue satisfying your payment obligations and the fact that the Property is not worth as much as the loan(s) secured by the Property, you or your representative must convince the appropriate decision makers at each lender that it is in their best interest to approve the Short Sale. Most lenders have a specific department that handles these requests, which is commonly referred to as either the Loss Mitigation, Pre-foreclosure, or Loan Workout department.
WHAT DOCUMENTS WILL I NEED TO GET STARTED?It is important that you start gathering these documents to allow your real estate agent to initiate the short sale. As you proceed through the short sale process, your specific lender may require and /or provide additional documents.
1. Authorization letter for real estate consult to discuss with lien holders
2. Hardship letter to explain your need to sell the home
3. 2 years tax returns include (w2's and 1099's) of all parties on loans
4. 2 months pay stubs of all parties on loans
5. 2 months bank statements of all parties on loans
6. Copy of all mortgage/lien statements with account numbers
7. Any correspondence from your lender concerning unpaid account
8. Financial information worksheet
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