Understanding Short Sales

What is it?

A short sale is a transaction where the lender agrees to accept less than the mortgage amount owed by the current homeowner. The loss is then either absorbed by the bank, or recovered through arrangements with the seller to repay after the sale.

Due to all the different banks involved in short sales, with little consistency between their rules, and a rapidly evolving market, short sales were truly the “Wild West of Real Estate”. To provide some form of structure, the Federal Government introduced The Home Affordable Modification Program (HAMP) , part of the Making Home Affordable (MHA) program in 2009. HAMP was designed to help financially struggling homeowners avoid foreclosure by modifying their existing loans to a level that would be affordable long term.

From that was born the Home Affordable Foreclosure Alternatives (HAFA) Program. This alternative scooped up those borrowers (sellers) who couldn’t qualify for HAMP. HAFA was also designed to standardize the short sale process and establish foundational guidelines for lenders and borrowers.

Incentives offered through HAFA encourage those involved to consider short sales where applicable, rather than moving forward with costly foreclosures.

The Basics

In order to consider a short sale, a lender will normally require disclosure of two years of IRS tax returns and a hardship letter explaining the situation. Some lenders, such as Wells Fargo, will provide a short sale “pre-approval” letter to sellers in order to expedite the process.

If the bank does not “pre-approve” the short sale, the required documentation, along with an executed sales contract, would all be submitted in one big packet for review. (*Regardless one thing is certain: Having all the paperwork completed correctly, the first time, makes things move much more smoothly.)

Pre-approval or not, the time to get from start to finish with a short sale can take anywhere from 2 - 4 months.

This extended time frame from contract to close creates additional risks to the success of the transaction. Pre-approvals may expire, interest rates change, or other pit-falls can appear to cause further delays or threaten the execution of the contract.

Ultimately, when considering a short sale, everyone involved needs to be educated on the process. The greater the understanding of the short sale process, the higher the probability of reaching settlement with the least amount of delay.