A short sale is a good choice for some homeowners who, for whatever reason, will no longer be able to make payments on their mortgage. Rather than suffer a delinquent mortgage, consider your options and take action before you start missing payments. Your long term financial freedom will be better-off if you act decisively.
Alternatives to the Short Sale
If you're facing mortgage delinquency and you want to stay in your home, then a short sale is not for you. In that case, you might need to look into the Obama loan modification program or some other mortgage restructuring plan.
A loan modification sets you up with new mortgage terms that work better for your new financial situation. A change in interest rate, deferring past due payments to the end of the loan, or extending the terms of the loan for a longer repayment period are all parts of a typical loan modification. With some lenders and in some states, you can even get your principal balance reduced.
Loan modification can help if your financial troubles won't be long term. However, if you don't know when you'll be able to make payments again, or if you need to sell your home for whatever reason, a short sale might be your best choice.
What Is a Short Sale?
A short sale is a deal you make with your mortgage lender, such that they permit you to sell your home for less than the balance of your loan. The proceeds of the sale go to the lender. It's called a short sale because the loan is considered repaid, even though the selling price is "short" of the balance due.
Obviously, you need your lender's approval to perform a short sale.
How Do You Start a Short Sale Process?
The first thing you need in order to start a short sale process, is a buyer's offer. Krebs Financial does buy homes with delinquent mortgages, and of course you can shop around for additional offers as well.
Once you have an offer to buy your home, the bank will need to be convinced that you are no longer able to make payments on your mortgage. The lender needs to be convinced that a short sale is the best way for them to get a return on the investment they made when loaning to you.
To show your lender proof of ongoing financial hardship, give them an updated picture of your financial status. This is similar to when you first applied for the loan, but with updated information. Job loss, the death of the family bread-winner, investment failures and other changes are all unknown to your lender until you provide that update. Here are some of the things they'll need to see before considering a short sale:
- Federal tax returns for the past two years.
- Bank statements for the past two months.
- Income documentation (such as pay stubs) for the past month.
- Your current mortgage or loan statement.
- A completed Fannie Mae Financial Statement.
- A letter of hardship, explaining in your own words why you will no longer be able to afford the loan. You should also explain any problems with the home in full detail.
- A property abstract and the closing documents from the purchase.
- Authorization for your potential buyer to speak with your lender.
- A signed offer from your potential buyer, which usually follows a showing.
How Long Do Short Sales Take?
Typically, a short sale process takes about 90 days. This time frame depends on the lender, the amount of information exchange between buyer and seller, and the time of year.
Here is a more detailed breakdown of the typical short sale process and time line.
Day 1: You submit a full "Short Sale Package" to us (or your prospective buyer) and we provide you an authorization letter to give your lender. This opens a line of communication between the buyer and your lender, which is usually processed by the lender in about 2-3 business days.
Days 3-4: We submit the Short Sale Package to the lender and present the offer. Once the documentation is verified complete by the lender, there may be additional requests for information. This step takes about 2-3 business days.
Days 5-14: We work with the lender to get a dedicated negotiator, who will handle the remainder of the process on the lender's behalf.
Days 15-30: We work with the negotiator to move the short sale process along, including requesting an independent appraisal or Broker's Price Opinion (BPO).
Days 30-45: The appraisal or BPO should be completed in this time frame.
Days 45-55: The negotiator will receive the final appraisal results in this time frame.
Days 55-80: Negotiate terms of sale with the lender and get approval to execute a short sale.
Days 80-100: Closing process.
Remember that this is a general time line for your guidance and reference, and may vary a bit.