Step-by-Step Short Sale Process for Home Sellers [2020 Guide]
Note: This article focuses on the short sale process for home sellers. If you are looking into buying a short sale property, read our other guide How to Buy a Short Sale Property: 8-Step Process for the Buyer.
Short sale is one of the 4 Last-Minute Ways to Stop Foreclosure Auction Before It Starts we wrote about previously. We also explained how it works and its pros and cons in our A-to-Z Short Sale Guide for Homeowners.
Now, after careful thought and consideration, you’ve decided that a short sale is the most beneficial move for yourself and your family’s future.
So, what’s next?
How Does a Short Sale Work for Sellers?
For sellers, the short sale process will consist of submitting financial documentation to the lender, writing & signing a hardship letter, hiring a short sale processor, and obtaining a listing agent.
Financial documentation the lender may require can consist of the last two years of your tax returns, most recent three months of bank statements, pay stubs, unemployment award letter, disability award letter, etc.
Working with a professional short sale processing company will ease this burden, as they will take on the role of sending the documents to the lender and following up. You can get in touch with a reputable short sale processor in your location who handles the whole process at no cost to homeowners by filling out this form. Or, to learn more about who short sale processors are and how they work, read my article ‘What Does a Short Sale Negotiator Do for the Seller?’.
The extent of personal financial paperwork the lender requires will depend on the type of loan that is defaulting. For example, an FHA Loan will typically require a much deeper financial review of the borrower than a conventional loan.
The hardship letter is the reason you cannot pay your mortgage, put in writing and sent to the bank. This is a very important document that will help support your cause for a short sale. Your lender will need to see a compelling reason as to why they should take a loss on the mortgage, by letting you sell via short sale. A good short sale processing company will compose this on your behalf, using the details from your unique situation.
Most lenders require the short sale to be listed by a licensed real estate agent, local to the market in which the property is located. In the bank’s eyes, they want to see that every attempt was made to obtain full market value for the home. Don’t have a real estate agent in mind? No problem! Your short sale processing company will assume the responsibility and assign a licensed listing agent to your property.
At this point you may be thinking about all of the possible outcomes that may result from attempting a short sale.
Here are a few:
- The short sale is successful. In this instance, you will be able to sell your home at a loss to the lender. Most importantly, you’ll avoid a foreclosure against your name.
- The short sale is unsuccessful. This can happen if the bank decides your property does not qualify, the home does not sell when it’s listed on the market, or if the lender appraises the property too high.
- A scheduled foreclosure auction occurs and the home is sold as a foreclosure to the highest bidder.
Overall, it is very important to know the risks of attempting to sell through a short sale. When your home is listed for sale, there is no guarantee a buyer will make an offer high enough that the bank will approve.
8-Step Short Sale Process for the Seller
1. Contact a Professional Short Sale Processing Company for a Consultation
First of all, contact a reputable short sale processing company and schedule a consultation.
The short sale professional will answer all of your questions and ensure you are qualified for a short sale. The qualifying questions will be very specific to your situation and current hardship.
Assuming you have determined a short sale is your best option, the short sale professional will send you a third party authorization form to sign. This document authorizes the short sale company to speak to your lender about the file.
2. The Processing Company Will Reach Out to Your Lender and Initiate the Short Sale Process
This step includes submitting the third party authorization form, as well as beginning to gather seller financial and hardship documentation required by the lender.
Common documentation required will be hardship letter (explaining why you can’t pay your mortgage), copies of w-2, bank statements, tax returns, pay stubs, etc.
3. The Processing Company Will Assign an Expert Local Real Estate Agent to List Your Home for Sale
The local agent will have the following characteristics:
- Licensed in the state in which the subject property is located.
- Expert in the local market, in which the subject property is located.
- Experienced in short sale listings.
4. An Offer Is Received and Submitted to Your Lender for Review
Upon receipt of offer package, the short sale processing company closely examines the offer, making sure everything has been submitted and filled out correctly. Any incorrect information can delay the lender’s review of the offer.
All lenders require offers to be submitted along with a preliminary settlement statement. This document helps the bank determine what their NET income will be from the offer.
Technically, it is the buyer’s responsibility to provide the preliminary settlement sheet. However, this often causes massive confusion and delays in the process.
This is why it is very important to work with a short sale company who provides the preliminary settlement sheet themselves, through their strong partnerships with local title companies.
5. Lender Conducts a Third Party Appraisal
After the lender receives all applicable offer documentation, they order a third party appraisal.
The purpose of the appraisal is to help them determine the current “as-is” value of the home.
Keep this in mind: banks are not in the real estate business, nor are they familiar with your local market conditions. So, they rely solely on this appraisal to determine what they’ll accept for your home.
The appraisal will take place in one of the following forms:
- Interior appraisal. This is conducted by a licensed appraiser and will include a full report on the home's condition, comparable properties in the area, and the value.
- Exterior appraisal. This is performed by a licensed appraiser. However, he or she will not enter the property. The report will mostly include comparable homes in the area, which will determine the appraiser's opinion of price.
- Interior BPO. “BPO” stands for Broker’s Price Opinion. Unlike a full appraisal, it’s done by a licensed real estate agent from the local market. It’s usually the less expensive route for the lender to go, as the agent doesn’t produce an extensive report.
- Exterior BPO. An exterior BPO is sometimes referred to as a “desktop appraisal”. This form of valuation occurs when the hired agent does not enter the property. Instead, they determine their opinion of value by simply using comparable properties in the area. The home’s interior condition is usually not a factor in these types of reports.
6. Lender Accepts or Counters the Offer
About 5-10 business days after the appraisal numbers are submitted to the lender, they review and will either counter the buyer’s offer or accept it.
Typically, the bank will accept an offer equivalent to the entire appraisal amount or a percentage of the appraisal amount. It’s not rare to see a required NET offer of around 80% - 90% of the appraised figure.
When an agreement on the price is met between the lender and buyer, the bank will issue an official approval letter. The letter will contain important information about the terms of the short sale including but not limited to closing, expiration date for settlement, closing costs lender will pay, purchase price, etc.
8. Settlement Day!
Your expert local real estate agent will attend settlement & guide you through the entire process.
You can breathe a sigh of relief and write an awesome testimonial for your short sale processing company.
How Long Does a Short Sale Take?
Average Short Sale Length
In the very best case scenario, a short sale can take 2-3 months. This timeframe is common when a strong offer is submitted along with the short sale package or shortly after the home is listed for sale.
In nightmare situations, where the short sale is being processed incorrectly, it can take up to 12 months! This is common when traditional listing agents or buyers attempt to take on the short sale themselves. Real estate agents are experts in marketing properties and procuring buyers, but typically lack the short sale knowledge and follow up systems in place to effectively facilitate the complex process.
Short Sale Timeline for the Seller
- Submitting and processing third party authorization: 1-5 business days
- Completing short sale package: 1-7 business days
- Lender processing short sale package: 5-10 business days
- Listing the property for sale “as-is”: 1-3 business days
- Preparing buyer’s offer package: 3-7 business days
- First-level lender review of offer package: 3-5 business days
- Second-level lender review of offer package: 3-10 business days (by law this can take up to 30 days.)
- Short sale approval letter generated and submitted to seller: 3-5 business days
- Settlement: 30-45 days.
Factors the Length of a Short Sale Depends On
Type of Loan
The type of loan in default has a major impact on the length of a short sale. Here is an overview of the three most common loans that enter into default and what to expect with each.
Borrowers defaulting on their FHA loans are not uncommon, due to the lack of down payment required.
In order to short sell these loans, lenders put the file through a “financial waterfall.” During this period, the borrower must go through the entire mortgage modification process, as if they were going to try and keep the home. After the mortgage modification application is denied, the borrower can then apply for the short sale.
During the short sale process, additional paperwork and approvals are required by the FHA investor, along with the standard processes of the servicer. Defaulted FHA loans are the most time consuming and extensive to complete.
Defaulted conventional loans are typically the least paperwork-extensive. The lender may or may not require the borrower to complete a mortgage assistance package. Unlike FHA loans, there is no “financial waterfall” here.
Fannie Mae Loans
When a defaulted loan is backed by Fannie Mae, the short sale processor will need to have an account with the investor’s communication platform: Homepath.
During the process, the borrower’s short sale representative will be expected to maintain multiple lines of communication- one with Fannie Mae and one with the servicer. The simultaneous conveying can sometimes cause confusion or hick-ups between Fannie Mae and the bank servicing the file.
Fannie Mae will approve the short sale, then the bank will issue the official approval letter.
A buyer can cancel or delay a transaction for two specific reasons:
1. Low Offer
He or she submits a low offer and is unprepared to justify the price to the bank. If the buyer’s offer is below the market value of the home, they must be prepared to “tell the story” of how they came up with their figures. They can submit “as-is” comparables, licensed contractor repair bids, etc.
2. The Buyer Is Unprepared
The buyer is unprepared and takes too long getting applicable documents to the processor. Buyer must be prepared to submit in a timely fashion: their corporation documents, complete offer package, and anything else the lender should request.
Aside from buyers, there are several other factors that can contribute to the delay in the short sale process.
Lack of a Professional Short Sale Processing Company
Short sale facilitators have very niche systems in place, which guide everyone through the short sale process.
Real estate agents and buyers are experts at their given craft, but often lack the time, systems, expertise, and patience to navigate a file through the short sale process in a timely fashion. Unlike a short sale processor, they are not solely dedicated and focused on building and perfecting systems to facilitate short sales.
A file that can be completed from start to finish by a professional 3rd party company can nearly cut the time in half, due to their follow-up systems alone.
Even with a third party short sale processing company involved, there will be numerous requests made of the seller to produce certain documentation and sign paperwork.
A borrower’s lack of motivation to short sell or general absence of responsiveness can result in the lender denying the short sale or the buyer walking away.
In order to avoid this situation, the seller must be notified up-front that documentation will be required of them throughout the process. If possible, the borrower should be provided with a list of items that will be required.
Incorrectly Completed Documentation
Short sale lenders are very particular when it comes to paperwork being completed or submitted correctly.
It is not uncommon for lenders to reject seller’s financial documentation and completed forms, due to minor errors or missing pieces.
Common rejections stem from a plethora of issues, including missing buyer/seller addresses on purchase contracts, wrongly dated closing dates on preliminary settlement sheets, unlegible bank statements/pay stubs, missing signatures/initials, etc.
When items are constantly getting sent back for corrections, the timeline for short sale completion greatly increases.
It is best to avoid the back and forth by checking the documentation carefully.
In situations where there is a secondary mortgage on the property, the time to complete the short sale will increase by a minimum of 7-14 days.
Once the primary lender conditionally approves the short sale, the file must be submitted to the secondary lender for their approval. On average, the primary lien holder will offer the secondary a $2,000-$6,000 contribution to settle. Because the amount is so low, there is a chance a negotiation will ensue before reaching an agreement.
An IRS lien against the subject property must be discharged before the lender considers a short sale. Discharging an IRS lien deserves an entire article of its own. Just know it is very complicated and time consuming.
Copies of Utility and Property Tax Bills
After the review of the preliminary settlement sheet, lenders will often request to see copies of outstanding utility or property tax bills. This is more common when the amount is on the higher-end. For instance, some banks have a rule which requires a copy of the utility bill for an amount exceeding $3,000.
The process of obtaining a copy of the bill is not as easy as it sounds. The title company working the file must initiate the request with the title searchers in the given county. This can take anywhere from 3-14 days to generate, depending on how backed up the searchers are.
The information provided on this webpage may not be applied to a particular reader's situation and should not be taken as a legal or financial advice. For a legal of financial advice contact a licensed professional in your location.
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