A short sale is the sale of a property for less than what the owner still owes on the mortgage. A short sale is an alternative to foreclosure when a homeowner needs to sell and can no longer afford to make their mortgage payments.
Here is an outline of how the short sale process works in Washington State.
1) Seller qualifies for a short sale.
Every situation is unique, but the general criteria for qualifying for a short sale are:
- You need to sell your home.
- You owe more on your mortgage than your home is worth.
- You have a personal financial hardship that will prevent you from making future payments. (Examples of hardship include loss of job, reduction in income, divorce, death of a spouse and medical emergency or illness.)
2) Seller short sale package is prepared.
Think of a short sale as an “unloan”. Rather than trying to get a loan, you’re trying to get out of a loan. In both cases, the bank needs a snapshot of your financial situation to determine whether they will approve the transaction. Each bank has its own guidelines, but the short sale package usually includes:
- Letter of authorization, which lets your short sale agent speak to the bank
- HUD-1, a standard form that outlines all the fees that are part of the real estate transaction
- Financial statement
- Hardship letter in which the seller outlines their personal financial hardship
- Two years of tax returns
- Two years of W-2s
- Recent payroll stubs
- Last two months of bank statements
- Comparative market analysis or list of recent comparable sales
An incomplete short sale package is one of the key reasons why banks reject short sales, so it’s crucial that the homeowner provide all the necessary paperwork and thoroughly explain their situation in the short sale hardship letter.
3) Home is priced and marketed by the short sale agent.
After the lender gives the go-ahead to move forward, the next step in the short sale process is determining a price for the home. Setting a price for a short sale is the delicate art of balancing what a buyer will pay and what the lender will approve. With thousands of distressed properties from across the country in their portfolio, the lender has no idea what the market value of an individual home is in your area. The bank will commonly hire an appraiser or another broker to determine a value for a home. Once the price is set, your short sale agent will market the property and show it to potential buyers.
4) Short sale offer is submitted to the lender.
An interested buyer submits an offer for the property. If the seller accepts the offer, the seller’s short sale agent will send the following items to the bank:
- Listing agreement
- Executed purchase offer
- Buyer’s pre-approval letter and copy of earnest money check
- Seller’s short sale package
5) Lender reviews offer.
The lender review step in the short sale process is lengthy. It can last anywhere from 45 to 120 days. The review process varies from lender to lender, but this is a typical scenario:
- Lender acknowledges receipt of the file.
- A negotiator is assigned.
- An appraisal of the property is ordered.
- All paperwork in the file is reviewed.
Since there is a limited timeframe for a seller to do a short sale before the lender starts foreclosure proceedings, it is critical that the seller’s short sale agent follows up regularly with the lender to make sure the process is moving forward.
6) The bank issues a short sale approval letter, or denies the sale.
Once an offer for a short sale purchase is agreed upon by the bank, they send the seller a written approval letter that outlines the terms under which the lender will authorize the sale. The letter includes the price, deadline for closing date and may address how the debt is treated. (It’s important to verify whether there will not only be a release of the lien, but a release of any future claims resulting from the loan.) The approval letter may also include a dollar amount the seller must bring to closing or other terms.
7) Seller agrees to lender terms and notifies buyer.
For the sale to actually proceed, the seller must agree to all the terms in the lender’s approval letter. The seller’s other option is to terminate the agreement. The sale will not move forward until the seller gives notice to the buyer that they have received the approval letter and have consented to the terms.
Every homeowner’s situation is different, so we always recommend that you speak with a professional who can advise you on the legal and tax implications for your circumstances. Washington Property Solutions offers free attorney and CPA consultations as part of our service. Call us at 425-381-2233 and we can refer you for a consultation.