How Does Short Sale Work?

by Michael Ertem

Many People do not know how short sale process work, even after Real Estate Crisis in 2008. A Lot of agents who represent Buyers are confused; often buyers are looking for direction, and not every short sale listing agent knows how to do a short sale. 

Banks will approve short sales for two reasons: 

The seller has a hardship, and the mortgage is higher than the home's current market value

What are some hardships that Lenders accept?

• Unemployment and or reduced income
• Medical Emergency
• Divorce
• Out of Town Job Transfer
• Bankruptcy
• Death

The seller needs to prepare a financial package similar to a loan application with supporting documentation to demonstrate to the lender that they cannot make mortgage payments due to the hardship and decreased value of their property. Each Bank's guidelines for short sale process is different. however the basic procedure is similar from one bank to another. Documentation required by the lender consists of below items at a minimum, they may require additional documentation.

• Letter of authorization, so that Listing agent can talk to the lender on their behalf..
• Preliminary HUD-1 which shows net closing numbers.
• Completed financial statement such as bank statements, BK papers, pay stubs.
• A hardship Letter explaining the Seller's financial situation.
• 2 years of tax returns
• 2 years of W-2s
• 30 days of payroll stubs
• Last 2 months of bank statements
• CMA (Property Market Analysis) or Broker's Price Opinion (BPO)

Banks are not in the business of giving up mortgage obligations at rock-bottom pricing. The bank will want to receive market value or less depending on the market conditions of that market. Listing Agent may set the price lower than current market value to receive multiple offers which makes the approval process easier or faster.

Seller, or current homeowner still accepts the offer and then Listing agent forwards following documentation to the current lender or Lenders if there are more than one encumbrances on the property

• Listing agreement between Seller and Listing agency Firm
• Fully executed purchase agreement between Buyers and Sellers
• Pre-Approval Letter for the Buyer and , copy of deposit check and proof of funds for the downpayment
• Seller's short sale package as required by the lender.

It is important that the short sale package is complete to eliminate any delays. If package is not complete, Lender may not even entertain the request at all until complete package is submitted. Approval process varies lender to Lender. It is very important that the listing agent to regularly communicate with the bank and keep careful notes of the short sale process.  It is common that Buyers are usually not patient enough to wait  for the approval process if it takes longer than expected and threaten to cancel the contract.

Buyers threats usually do not have any effect for lenders' timing or the way they process. If buyers are not patient, perhaps a short sale may not for them.

Following is a typical short sale process at the bank:

• Bank  receives and acknowledges receipt of the file. This can take several days to a several weeks.
• Bank assigns a negotiator. This can take a week to 30 days.
• A BPO is ordered by the Lender.
• There may be a second negotiator to be assigned. This can take another 30 days.
• The file is sent for review . This can take one week to 30 days.
• The bank may then request that all parties sign an Arm's-Length Affidavit.
• The bank issues a short sale approval letter.

If Buyer cancels during the approval process, it is OK, Once approval is obtained, backup offers can be entertained at the approval level.

I cannot emphasize  enough the importance of the complete package for a successful approval process. At Northern Crest Realty, we will make sure with the timelines and completeness of the package as well as determined follow up.