Most lenders won’t even consider a short sale until you are at least 60 days in arrears and dealing with the loss mitigation/remediation department (not customer service). And while not making your payments is a sure way to get their attention, it’s a risky strategy that will destroy your credit and may not get you out of your mortgage jam.
And few lenders will even speak with you about a short sale unless you approach them with a contract. So it’s kind of a chicken and egg thing–you can’t guarantee the buyer that your lender will allow a short sale, and you can’t discover the lender’s position unless you have an offer….
Which bring me to the real purpose of a short sale from the lender’s point of view. It’s not to relieve the owner of the burden of a bad investment decision. It’s to minimize the loss to the lender. Period. So if you want to get a short sale approved, you have to show your lender that a short sale will produce the best outcome. This means proving that foreclosure is probably inevitable and that a short sale will save the lender the costs of maintaining and disposing of the property. Here are the factors that make a short sale more attractive to a lender:
• The borrower has insufficient income to make the mortgage payment (job loss, health issues, or other catastrophe is a good reason–too much credit card debt or an expensive Ferrari habit isn’t).
• There isn’t enough equity in the property, due to reduced values, negative amortization, or high loan-to-value ratios to be able to pay off mortgages by selling the property.
• The homeowner lacks the assets to pay the lender in full if the property sells for less than the balance of the loan(s) against it.
To increase your chances of being approved for a short sale, you need to prove the above-mentioned points. Do this by furnishing the following:
• Documentation of income (or lack of). Provide your tax returns, current pay stubs, unemployment compensation, etc. Include a medical diagnosis if applicable. If income reduction is permanent, obtain necessary documentation to prove your claim.
• Document the property value. Get a market analysis (CMA) from a real estate agent, your property tax assessment from your county, even a new appraisal if you think it’s needed to show a drop in your property’s value. If you can get a settlement statement (form HUD-1) prepared to show the estimated expenses and proceeds from the sale it can speed up the process. Include a copy of an offer if you have one. Also, if working with a real estate agent or attorney, put a letter together authorizing them to work on your behalf and allowing the release of personal information between the lender and your representative.
• Document assets. Provide copies of statements (all pages) for every account you have–checking, savings, investments, and business. Don’t leave anything out; your lender will likely notice the omission (remember, you listed your assets when applying for a loan, so it’s not like they can’t check). If your assets are insufficient to offset your deficiency you have an excellent chance of having a short sale approved.
And finally, any request for short sale should include a “hardship letter” which explains why you need to do a short sale. Don’t make it a sob story, but explain what happened and why you are unable to fulfill your obligation as a borrower. Spell out what selling price you are asking the lender to approve and what closing costs and real estate commissions will be involved. Ask the lender to forgive the difference between what is owed and the proceeds of the sale. If the lender doesn’t forgive the balance you could be sued for it in most states. In other cases, the lender may approve the sale but only if you agree to repay part or all of the deficiency over time.
Short sales can work but they take time, effort, and more than a little luck.
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Is it possible to get a short sale on a second home that has fallen behind on payments?
Programs like FHASecure require that the home be your primary residence. However, a second home is an excellent candidate for short sale if it meets the criteria I specified in my post. One thing you will probably have to prove: that your primary residence doesn’t have enough equity to bail out your second home–for example, if there is equity you could get a second mortgage against your primary home to make up the deficiency on the second home.