Back in real estate’s dinosaur days, the short sale specialist was a rarity. I worked with a total of one of these specialists in the entire decade and a half that I sold real estate. I, like many of his other colleagues, didn’t quite understand his specialty – how the process worked. Lucky for the area’s underwater homeowners, he knew exactly what he was doing and is still helping homeowners today.
We’ve all been baptized by fire when it comes to the short sale process. What is a short sale in real estate? Consumers know the rudimentary details: A short sale occurs when the lender agrees to take less than what is owed on the home, and short sales wreck your credit. But there is a lot of misinformation out there and a lot more to know about the short sale process.
First, let’s take a look at some history.
The Housing Mess
Call it a housing bubble or call it a housing market crash, what occurred in 2006, 2007 and 2008 was devastating to millions of American homeowners. Although home prices began a downward spiral in 2006, by the end of 2008 the Standard & Poor’s Case-Shiller home price index experienced its largest drop ever.
Lenders were foreclosing on American homeowners at an alarming rate, refusing to negotiate foreclosure alternatives. Rather than refinance a $350,000 loan for a struggling homeowner, the lender would foreclose and end up with an REO on its books that would eventually sell for less than half of what the original homeowner was willing to pay.
Banks Wise Up
The situation today is far different. Somewhere along the line lenders realized that they get far more money from short sales than foreclosures.
Not only do the homes sell for more money, the bank doesn’t have to sit on the real estate, the homes are in better condition, and the homeowner does all the work of unloading the bank’s assets. What a deal!
Short sale requirements relaxed as lenders became more willing to work with underwater homeowners. At one point, in 2011 and early 2012, lenders were actually paying some homeowners to short sale their homes.
The process, once protracted and cumbersome, became more homeowner friendly. Recently, the Federal Housing Finance Agency (FHFA) imposed new rules on Fannie Mae and Freddie Mac that promise to speed up the short sale process even more.
The Short Sale Process in a Nutshell
- The homeowner, for some reason, is no longer able to make her mortgage payments.
- The homeowner hires a real estate agent and puts the home on the market.
- A buyer makes an offer on the home, which is then sent to the lender, with other documents (the “short sale package”), for approval.
- The lender evaluates the short sale package and the offer and makes a determination whether it will accept the offer or not.
In an ideal world, this is how a short sale proceeds. In the real world, any number of variations of the process, and the outcome, occur.
Qualifying for a Short Sale
While diminished home value is the most obvious qualification required by the lender for a short sale, there are others:
Financial hardship – Lenders will only consider certain hardships when granting permission for a short sale. These include:
- Job loss
- Death of one of the borrowers
- Chronic Illness
- Divorce
- Involuntary job relocation
- Military deployment
- Incarceration
Although you must prove a hardship, short sale requirements are fluid and vary by lender. Some will consider a new addition to the family, such as a baby or taking in an elderly relative, a hardship, others won’t.
Assets – All assets must be liquidated to pay down the mortgage before the lender will consider a short sale.
Considerations
If you think that you may want to buy another home in the near future, it’s important to keep your mortgage payments current during the short sale process. This one act alone may help you qualify for a mortgage backed by the Federal Housing Administration (FHA). If you are delinquent when the short sale closes, you’ll have to wait three years to get an FHA-backed loan.
One of the most important steps to take, whether you are the buyer or seller, is to enlist the services of a qualified real estate agent. The short sale is not your typical real estate transaction, and, although Uncle Joe may be a great agent, if he lacks extensive short sale experience, look elsewhere for an agent.