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The Short Sale Process - A guide for Buyers and Sellers

The Short Sale Process - A guide for Buyers and Sellers

The Basics of a Short Sale

Banks grant a short sale the seller has a hardship and the house is worth less than the property is worth in the current market.  The short sale is simply a seller contingency of the contract similar to the financing and inspection is a contingencies requested by the buyer.  Your offer should have few contingencies except inspections and financing.  Currently, most lenders are not approving 6% seller concessions.  Some wonít approval any seller concessions.  Donít assume the lender will pay for normal seller related closing costs including title insurance and document stamps.

A few examples of a hardship are:

Unemployment or reduced income (hours cut), death of a spouse, divorce, or separation, medical emergency, including caring for a parent, job transfer out of town, bankruptcy, or increased costs, such as rising taxes, interest rates, utility costs.

The seller will need to prepare a financial package for submission to the short sale bank. Each bank has its own guidelines but the basic procedure is similar from bank to bank. The seller's short sale package will most likely consist of:

 Prepared by the seller

∑         Letter of authorization, which lets your agent speak to the bank.   

∑         Financial statement (Agent or bank will supply forms)

∑         Hardship letter explaining the exact hardship

∑         2 years tax returns

∑         2 years W-2s

∑         2 most recent payroll stubs

∑         Last 2 months of bank statements, all pages

Not prepared by the seller

∑         Comparative market analysis or list of recent comparable sales (prepared by the agent)

∑         HUD-1 or preliminary net sheet (prepared by the title company)

Writing the Short Sale Offer and Submitting to the Bank

Before a buyer writes a short sale offer, a buyer should ask his or her agent for a list of comparable sales. The bank will want to receive market value after the expenses of the sale are complete. The short sale list price may have little bearing on market value and may, in fact, be priced below the comparable sales to encourage multiple offers.  Your offer should be at market value or slightly above, depending on condition.

After the seller accepts the offer, the listing agent will send the following items to the bank:

∑         Listing agreement

∑         Executed purchase offer

∑         Buyer's preapproval letter and copy of earnest money check

∑         Seller's short sale package

If the package is incomplete, the short sale process will be delayed. In this event, the bank might even shred the package.

The Short Sale Process at the Bank

Following is a typical short sale process at the bank:

∑         Bank acknowledges receipt of the file. This can take 10 days to two months.

∑         A negotiator is assigned. This can take 30 to 60 days.

∑         A BPO is ordered. The bank probably will refuse to share the results of the BPO.  This can take 2-4 weeks to complete and get back to the lender.

∑         A second negotiator may be assigned. This can take another 30 days.

∑         The bank may request more information from the seller.

∑         The file is sent to the investor for review. This can take 2 weeks to 30 days.

∑         The bank may then request that all parties sign an Arm's-Length Affidavit stating that parties in the transaction are not related.

∑         The bank issues a short sale approval letter.

Time frames are approximate.  Be prepared to wait 4-8 months for approval after entering a contract. 

After Contract Hints

Buyers may wait a very long time to get a response from the bank. Buyers may get so tired of waiting for short sale approval that they may feel the need to threaten to cancel if they don't get an answer within a specified time period.   Sellers may get so frustrated that they threat bankruptcy.  Neither action moves the lender any quicker and often serves to slow down the process because the lender waits to see if the parties involved are serious about buying and selling before spending more time on securing approval.  It may force the bank to file foreclosure, if they have not done so, just to have their foreclosure on record first, before the seller files bankruptcy.  Then they fight the bankruptcy by making it appear the seller only filed bankruptcy to avoid the foreclosure.  It is imperative for the listing agent to regularly call the bank and keep careful notes of the short sale process, then update the selling agent on the step that has been completed and what the next step will be.  Confidential terms between the seller and the lender should never be discussed with the buyer or selling agent.

What the seller should do

∑         Keep all new bank statements and pay stubs readily available.  Most often, the lender will request updated financials just before approving the file since some time has passed.  If you are proactive, you can send them to your agent monthly so your agent has them when they are needed. 

∑         Not spend their money on foolish items using their debit or credit cards.  The bank will see the history of your credit card payments and your bank statements reflecting your spending. Buying a big screen TV or a new car while not paying your mortgage will not help your cause!  Use common sense.  Talk to your agent!  If in doubt, ask.

∑         Be patient!  Be prepared to wait 4-8 months for lender approval.  Be prepared for issues that may arise on the buyer side of the process which begins after lender approval. 

What the buyer should do

∑         Have patience!  The process time frame is not in the control of the agents or seller.  Every bank has a process and time frame.  You must be prepared to wait 4-8 months for approval from the sellerís lender.  If you are not, perhaps the short sale purchase is not the best type of purchase for you at this time.  You should evaluate that at the time of the offer.  Talk to your agent before entering a contract for short sale.

∑         Understand that if the selling agent has an update, they will communicate that with your agent, who will pass the information to you.  If you understand the time frame and process, youíll be able to anticipate the next step.

∑         You should use this time to gather loan documents, such as, your tax returns for two years, bank statements, pay stubs, paperwork for child support and related court orders, and other documents your lender will need.  If you keep all those documents together, when you get approval and have inspected, you will have everything you need to submit your loan in a timely manner! 

∑         Do not make purchases that change your credit snapshot once you prequalify for a mortgage. 

 

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