A home short sale usually happens when borrowers are “upside-down” on their mortgage – meaning their home’s value is worth less than what they owe. With lender approval, the property is sold for less than the outstanding balance, the lender will accept less than the mortgage balance, and will clear the property’s title of a mortgage lien.
If you own your home outright or have a mortgage balance of less than the selling price and you sell for less than you think it is worth, this is not a short sale.
Eligibility & Requirements
To agree to a short sale, lenders look for several things. You must currently live in the property and have a loan that is at approximately or more than two months delinquent. Your loan should have been made in connection with the purchase or refinance of the property. Most importantly, you also must have a good reason (called a hardship) why your loan is in default. The hardship must be unavoidable AND likely to continue for a lender to approve a short sale. Hardships likely to be approved for a short sale are very similar to those of a loan modification.
Short sales are usually allowed when the property value is at least 70% of the loan balance, the contract sale price is at least 95% of the appraised value and the net amount for the bank is at least 87% of the current property value.
After an initial consultation to determine if you are eligible for a short sale, you will sign an agreement allowing us to represent you and handle all communication with your lender. One of our real estate attorneys will make a presentation to the lender, outlining all the circumstances of your case. It is important to have an experienced attorney help you with this step, as the short sale package presented must be complete, thorough and detailed and present a clear picture that the borrower is headed toward foreclosure or bankruptcy. We will also draft or review a Purchase & Sale Agreement.
Once the lender receives your short sale package, they will review it and determine if your situation can be approved. There may be some negotiation between the attorney and the lender to create an attractive option for both parties.
It will likely take between 60-90 days for the entire short sale process, and any attorney fees will be taken out of the proceeds of the sale. If the lender accepts your proposal, your short sale will be ready to go. Keep in mind that not all short sales are approved. For this reason, it is crucial that you submit an accurate and detailed short sale package to improve your chances.
Why would a lender agree to do this? Lenders are in the business of lending. They do not want to own and maintain your property. Although they are accepting a lower amount, they are willing to take this and prevent worse alternatives:
- Having to buy back the property if the bidding is too low at a foreclosure auction
- Getting even less after foreclosure when the property is bank-owned
- Losing the entire balance of the loan if the borrower sues for predatory lending
- Sometimes the lender can reach other assets to collect the deficiency but the borrower is generally considered “judgment proof.” If borrowers cannot pay the mortgage, how could they pay off the deficiency?