When a mortgage foreclosure looms in the horizon, and loan repayment and remortgage plans are no longer viable options, it’s time to learn how to prepare a short sale package. Simply put, a short sale package is a bunch of documentation papers that are required to initiate a short sale.
And, what is a short sale? A short sale is the selling of a house for an amount that is lower than the balance left on the mortgage loan. It is a better alternative to foreclosure for both the lender and the borrower because the lender avoids the exorbitant fees that a foreclosure entails and the borrower lessens the negative impact on his credit score, compared to the effect of foreclosure on credit score.
Not all debtors are eligible for a short sale of their house. Most lenders approve short sales if 1) the owner of the house has undergone a hardship, such as a divorce, loss of employment or a medical emergency, 2) the loan amount is more than the value of the house, 3) the owner is incapable of paying the current monthly amortization and, 4) the owner is not eligible for a repayment or modification plan.
When it has been determined that the borrower meets the basic qualifications, it will be time to put up the house up for a short sale. After choosing a local short sale Realtor to direct the process, it’s time to prepare a short sale hardship package. Here are the typical documents needed for a short sale package:
• Letter of Authorization
As the seller, you should write a letter authorizing your agent, lawyer or other interested parties to talk with the lender on your behalf regarding the short sale. The following information should be included in the letter: the date, property address, loan reference number, your name and the agent’s name and contact information.
• HUD-1 (preliminary net sheet)
The preliminary net sheet shows the estimated proceeds from the short sale and all the expenses, unpaid loan dues, penalties and late fees and even commissions, if any. The bottom line should show that the seller does not get any cash from the sale.
• Financial Disclosure Form
Be truthful when declaring your assets. Include savings accounts, money market accounts, stocks, bonds, other real estate properties, if there are any.
• Seller’s Hardship Letter (explaining how the hardship came about)
In your letter, describe the circumstances that led to the hardship, be it loss of a job, a divorce or death in the family or an illness or accident that required major expenses. Include supporting documents such as medical records, job termination papers, etc. The bank needs to know that the hardship is real and valid for it to approve your intended short sale.
- Latest Two Months’ Payslip
- Most Recent Two Months’ Bank Statements (for each borrower on the loan, if there is more than one)
- Two Years W2 or personal tax return
- Repair Estimates for the Property
- Broker Price Opinion
- Sales Contract
In addition to the lender and the borrower, there are other parties who may need to approve the short sale, such as the second mortgage holders, the investor of the mortgage, mortgage insurance company, tax lien holders and mechanic’s lien holders are all other parties who may want the final say so . The multiple parties involved and the technical and legal processes make the short sale a complicated type of transaction. One that should preferably be handled by experienced short sale specialists. There are tax implications as well, thereby adding to the complexity.
If there is an interested buyer for the property, the buyer will make a short sale offer and if accepted by the seller, the listing agent will send to the bank the following items in a short sale package: listing agreement, executed purchase offer, buyer’s pre-approval letter and a copy of the earnest money check, and the seller’s short sale package.
Once the bank receives all the required documents, they will work on the short sale process. Historically, banks take their own sweet time to respond to the short sale offer, which can be annoying and have in fact led to several buyers cancelling. Thus, it is the responsibility of the listing agent to follow up with the bank regularly. The following is a usual bank process for short sales:
1. Acknowledgement of receipt of file
2. Assignment of a negotiator
3. Requisition for a Broker Price Opinion
4. Assignment of a second negotiator (optional)
5. Review of file by the Pooling Servicer Agreement
6. Bank requires all parties to sign an Arm’s Length Affidavit (to guard against mortgage fraud)
7. Bank approves the short sale
The short sale process can be an ordeal for the seller and the buyer when the bank takes a long time to process the sale. The lengthy waiting time is often the reason for buyers’ cancellations. Processing can take anywhere between several days to several months, depending on many factors.Organizing the short sale process can be a daunting task for the homeowner. An experienced short sale agent can guide you through the process and help make the transaction go much more smoothly. Don’t wait for the foreclosure date to draw near. Ask us for help on how to prepare a short sale package.