What Is the Short Sale Process in California for Home Sellers?

In California, a short sale is when a home owner’s bank allows them to sell their property for less than what they owe on their mortgage balance. The seller is usually behind on their mortgage payments and their house is “underwater”, meaning that its current market value is lower than the amount owed for it.

After the short sale is approved and the home is sold, it does not go down as a foreclosure on the CA homeowner’s financial record or credit report.

All the proceeds from the sale go to the lender, and in many situations the lender doesn’t go after the seller to have them pay the difference between the mortgage amount and the sales price of the property.

When there is an option to do a short sale, it’s normally a preferred way to avoid foreclosure. I wrote a few other articles to explain its pros, cons, consequences, and to compare it to other possible outcomes:

• Short Sale vs. Foreclosure vs. Deed in Lieu (Difference, Pros and Cons)
• How Does a Short Sale Affect Your Taxes?
• How Long Does a Short Sale Stay on Your Credit Report and How Bad Does It Hurt It?

1. Consulting with a Professional Short Sale Processor

It’s best to start the short sale process with contacting a California short sale processor (also called short sale negotiator or facilitator) providing free service to homeowners. Many short sale processing companies get paid by the home buyer rather than the seller.

This totally makes sense, considering the fact that homeowners short selling their property are supposed to be going through financial hardship, thus they can’t pay. Some companies, though, will charge you upfront or monthly — I recommend you to avoid them. Make sure to clarify this when interviewing a short sale processor.

I wrote an entire article explaining in detail what What a Short Sale Negotiator Does for the Seller. But in general, a short sale processing company will facilitate the entire short sale, from start to finish. This includes, but is not limited to:

• processing the mortgage assistance documentation
• being the direct contact for the short sale lender
• keeping the lender accountable to their timelines, etc.

When you are interviewing your potential short sale processing company, be sure to ask them to provide a detailed explanation of their follow up and communication systems with the lender.

To get connected with a reputable company that provides professional short sale processing help free of charge for homeowners, you are welcome to fill out this form. I will get back to you shortly to talk about your situation and process your short sale at no cost.

2. Qualifying for a Short Sale in California

Before contacting the bank to initiate the short sale process, your short sale facilitator will make sure you meet the qualification requirements. They will determine the right way to present your case to the lender so that you will have more chances to get approved.

There are three main factors that will qualify you for a short sale in California:

1. Mortgage delinquency. In other words, you must be currently behind on your mortgage payments or expect to be behind soon.
2. Negative equity. In other words, are you underwater on your mortgage payments? Here is a quick example: if your mortgage balance is $200,000 and the “as-is” value of your home is $150,000, you are “underwater” or “upside down” on your mortgage.
3. Valid financial hardship. To be allowed to do a short sale and be forgiven the difference between the outstanding mortgage balance and sales price, you need to be able to prove that there is a serious reason why you can’t pay your mortgage.

3. Reaching Out to the Lender to Start the Short Sale Process

When you are ready to contact your lender to request a short sale approval, your short sale facilitator will ask you to sign a third party authorization form. This is an agreement that authorizes your processor to speak with the lender about your mortgage and work with your financial documentation.

Once it’s signed, they will submit your documents to the lender and start the negotiations.

4. Listing the House on the Market

The short sale lender in CA will most likely require that your home be listed on the market with a local, licensed real estate agent. Even though the lender is accepting to take a loss, they still want to sell the house at the highest possible price, which means professional marketing and shopping for offers.

A good CA short sale processor should be able to hire a real estate agent for you or they will already have a realtor as a partner.

5. Lender’s Review of the Offer

Once your home is listed on the market with a local CA agent, hopefully you receive an offer (or two or three!).

Once your short sale processor has what they need to submit the offer to the lender, they will put together the complete offer package. This includes a title pull down and an official California preliminary settlement sheet. The prelim settlement sheet will give the lender an idea of what they’ll NET from the offer, after paying all of the seller-side expenses.

Once the complete short sale offer package is submitted, first level review begins. First level review is when the short sale lender’s underwriting department reviews the documents and makes sure they have everything they need. Once this is confirmed, second level review is initiated.

Second level offer review is the point in the process where the lender makes their decision. In order to make a decision on the file, your lender will order a third party appraisal.

6. Independent Appraisal or Broker’s Price Opinion

As mentioned above, the lender hires a local California third party appraiser to value the home. The appraisal result will determine whether or not the bank accepts or counters the buyer’s offer. They will usually be inclined to accept an offer equal to the appraisal amount or a certain percentage of the value.

For example, if the third party appraiser determines your home is worth $250,000, the short sale lender will likely accept that amount or a percentage of that amount.

Keep in mind the lender’s NET income from the offer will come into play as well. The NET is what they are left with after paying seller-side closing costs, such as Realtor commissions, transfer taxes, etc.

7. Lender Approves or Negotiates the Offer

After the third party appraisal is completed, the lender will continue their review of the short sale offer. Based on the appraisal price, they will approve the offer or counter it.

If they decide to make a counter offer, a negotiation will ensue. If they come to an agreement with the buyer, the next step is closing. Otherwise, the realtor will have to find another interested buyer.

8. Closing

Congratulations! The hard part is over! The short sale approval letter has been sent out and closing has been scheduled. All you need to do now is show up on time to the local California settlement office and sign the closing documentation!

Remember to save ALL of your short sale approval paperwork and settlement documents in a file, in case you ever need them. It will also be helpful to have this available during tax season.

Average Short Sale Length in California

“How much will a short sale take?” is an extremely popular question amongst CA short sale sellers. The fact of the matter is that there is NO WAY to accurately predict your short sale length.

In California, there are several factors that come into play that can have an effect on the timeline of the short sale. To name just a few:

• the amount of time the CA homeowner takes to get the short sale processor the needed mortgage assistance documentation
• the amount of mortgages that are involved in the transaction
• how long the property sits on the market, etc.

Although there is no correct answer to how long a short sale takes, 3-5 months is a safe average to go by.

Short Sale Timeline for a California Seller

While the time frame for a California short sale seller is highly dependant on the factors mentioned above, here is a generalized summary of what the timeline looks like in most cases:

1. CA Short sale lender conducts the third party authorization: 3-5 business days.
2. The Mortgage Assistance application and all supporting hardship documentation is submitted to the CA short sale bank: 1-2 weeks.
3. After consistent follow up from the short sale processor, the lender confirms receipt of the mortgage assistance package and begins to process the documentation: 7-30 business days.
4. The realtor puts the home up for sale on the MLS: 1-2 weeks.
5. An offer on the property comes in: 30-60 days.
6. The complete offer package is put together by the CA short sale company, then submitted to the lender: 3-7 business days.
7. Review of the offer package: up to 30 days by law, but when a short sale is negotiated by a professional processor, it normally takes 3-10 business days.
8. Getting a short sale approval letter from the lender: 3-5 business days.
9. Settlement: 30-45 days.

Factors that Can Delay the Closing

Here is an extensive list of the factors that define how much time and effort short selling your home in California will take.

Type of Loan

FHA

FHA loans are by far the longest, in terms of processing from start-to-finish. FHA short sales are government-regulated and force the seller to go through a “financial waterfall”, or mortgage modification, before the file can be considered for a short sale. This can add up to 30 days to the review process.

Conventional

CA short sales on conventional loans typically move quicker than FHA. However, they can still be a bit of a wild card, because they are not government-backed. So, the private loan holders make their own short sale processes.

Fannie Mae

Fannie Mae short sales have an extra step involved in the processing. All short sale offers must be submitted through the Fannie Mae specific portal called Homepath. With an experienced CA short sale processing company on your side, this won’t be a big deal. They will have an existing Homepath account, which will allow a smooth and quick transition when uploading the offer.

Buyer’s Reliability

1. Low Offer

An offer that is too low will just waste time and accomplish nothing. For example, if a lender’s third party valuation comes in at $115,000 and the buyer’s offer is $30,000, there is an extremely low chance it will get accepted.

2. The Buyer Is Unprepared

Short sale offers are very different from traditional sale offers. They need to be packaged and presented the correct way to the lender, or they will not be reviewed.
Without the correct systems and guidance in place, many times buyers incorrectly submit offers, which holds up the short sale process.

Competence of the Specialist Processing Your Short Sale

Without a short sale processing company who is experienced and has the correct follow up and communication systems in place, the transaction can be greatly prolonged.

Seller’s Cooperation

The seller is the key piece to the puzzle when it comes to short sale completion. In order to initiate the short sale, the seller must complete the mortgage assistance application and provide the financial documentation that goes along with it.

Delay by the seller in this area will put the rest of the short sale on hold.

Documentation Errors

Any errors found in the CA short sale package (big or small) will result in the lender rejecting the short sale and asking for the missing documentation and/or corrections.

Once the issues are corrected, the review process starts all over again.

Second Mortgages

If your property is serving as a collateral for more than one loan, the process becomes more complex. You need to have both lenders accept the offer. The first lien holder approves the short sale, and then negotiates about it with the second mortgage lender.

IRS Lien

An IRS lien can prohibit the short sale of a property in the state of California. The IRS lien must be either removed or “released” in order for the sale to go through.

Property Tax and Utility Bills

The short sale lender will pay property tax and utility bills up to a certain amount, but the lender may decline to pay large sums.

If you have read till this section, you have already understood that with all intricacies involved, doing a “short sale by owner” will take months longer than if you get professional help.
In the worst case, the lender can just foreclose during the short sale negotiations, if they are conducted unprofessionally. The same is true when entrusting a real estate agent with processing your short sale just because they said that they have processed a few in the past.

Fortunately, you can find a professional and competent short sale processor who will do the job completely for free for you (as they will get paid by the buyer).
If you think my article does show that I’ve spent years helping California homeowners process short sales as my main business, you are welcome to fill out this form to connect with me. I will get back to you, we’ll talk about your situation, and then have your property short sold in the shortest possible time, with minimum hassle for you.