When you are facing foreclosure, selling your house in a short sale is often a good option. A short sale of your home is handled through a real estate agent just like any other real estate transaction. The difference is that you do not recoup enough to cover the remaining balance on your mortgage.
The Short Sale
A short sale takes place when you are “underwater” on your home and owe the bank more than you will get from the sale. To determine if you are underwater, find out from the bank how much you still owe on the mortgage and add in agent fees and closing costs. Then ask a real estate agent for a Comparative Market Analysis (CMA) to get a good idea of how much your house is worth under current market conditions.
Once you have that information, subtract the amount you owe the bank from the price are likely to get for your house. If you can expect to receive $375,000 from the sale and you owe $475,000, you are underwater by $100,000. If you are underwater, you can ask the bank to accept an offer from a buyer that is close to market value in a short sale, even if the sale will not pay off the balance on your mortgage.
Why do a Short Sale?
If you are behind on your mortgage payments, you can simply sit back and wait for the bank to foreclose and evict you from your home. Or you can be proactive, sell your house and move on for a better life, even if you are underwater. It’s your choice, you can keep the house, lose the house, sell the house. With a short sale, you stay in control of the timeline of your move, not the bank. The sale is handled with respect since you do not have to go through a contentious foreclosure by dealing with the bank’s lawyers.
After a short sale, you may be able to apply for a mortgage on another house after two years and a 10 percent down payment. With a foreclosure, you may have to wait seven years to apply for a mortgage. A foreclosure can leave a negative mark on your credit for seven years as well.
Short Sale Advantages for the Bank
You may be wondering why the bank would accept a short sale that produces less than you owe on your mortgage balance. A short sale benefits the bank because it avoids a time-consuming, expensive foreclosure where the bank ends up with your house to sell. If the bank repossesses your property, they will hire contractors to maintain the property and pay a realtor to sell it.
With a short sale the house is sold directly to new owners by you, the homeowner, and the bank never owns the home. The majority of houses sold in short sales are in better condition than houses sold in foreclosure auctions or bank owned properties. Considering the expense of foreclosure, the bank is likely to come out ahead in a short sale, with less work on their part.
How to Do a Short Sale
To sell in a short sale you have to deliver the right paperwork to the right person at the bank. A realtor who specializes in short sales can guide you through the process. It is important to cooperate fully by putting together a convincing and complete short sale package and returning signed documents promptly when asked.
Here are some items to include in the short sale package:
- A Comparative Market Analysis
The bank will want evidence that the real estate market will not support a price to pay off the mortgage balance. Make sure the Comparative Market Analysis is up to date and reflects similar homes in your area that have recently sold. If prices are dropping, point out that trend so the bank will not expect to get more if they foreclose, repossess your home and sell it down the road.
- Your Hardship Letter
Your hardship letter is your chance to explain why you are having financial difficulties and why the bank should accept your short sale. Maybe you lost your job, there might be an illness in the family, or you may be in the middle of a divorce. Tell the bank if you are a senior citizen, and let them know if the short sale will prevent you from having to file for a bankruptcy.
- Your Income and Expense Sheet and Supporting Documents
Provide the bank with a balance sheet that clearly shows your monthly income and your monthly expenses, so the bank can see why you are having trouble coming up with your mortgage payments. Give them bank statements and other documentation to support the balance sheet. Include copies of your income for the last couple of months. The bank will also want to see your federal income tax returns for the last two years as well.
- An Arm’s Length Affidavit
The bank will have you sign an Arm’s Length Affidavit stating that you and the buyer have not had a prior relationship. This document prevents fraud so you, the seller, will not cheat the bank and profit from the short sale.
- The Offer to Buy
Give the bank the short sale offer to buy your house and evidence that the buyer is committed and able to afford it. Include a pre-approval letter from the homebuyer’s lender and bank statements that show enough funds for a down payment.
- Settlement Statement (HUD-1)
Your real estate agent or attorney can provide a net sheet listing all the closing costs that are anticipated on the short sale including realtor fees, judgments/liens and back taxes, if any. Keep in mind there is no out of pocket expenses for the homeowner. These costs are picked up by bank.
Tips to Encourage the Bank to Agree to a Short Sale
- Return documents to the bank promptly, even if you believe you have already done so. Keep in mind that some documents may have been changed to a newer version.
- Check to see that the documents are complete before you send them.
- Be sure that the offer is close to the prices indicated on the CMA.
- Document that the buyer is financially sound and committed with a proof of funds, a pre-approval letter and a copy of the earnest money deposit.
Getting Help with your Short Sale
Realty Warehouse can help you with a short sale if you are facing foreclosure and you live on Long Island or in the five boroughs of New York City. Our representatives help homeowners weigh their options in order to find alternatives to foreclosure such as a short sale and achieve the best possible outcome. Realty Warehouse enjoys an A+ accreditation rating from the respected Better Business Bureau. You can count on us to listen to your situation, offer the advice you need and provide effective alternatives in a stressful situation.
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This blog is for informational purposes only, subject to change.