Do short sales scare you? If so, you are not alone. But, take heart…if you have patience and understanding you can tame the short sale beast and make her work in your benefit, by getting you great deals on real estate! But before you can survive or succeed in the buying of a short sale you should know what a short sale is. Having a clear understanding of what you are dealing with is crucial to a successful purchase of a short sale.
A short sale can be defined as the sale of real estate where the proceeds from the sale are less than (or fall short of) the total debts and liens that are on the property. For example; if the total debt from the mortgages is $150K and the property sells for $130k then this would be classified as a short sale.
All short sales have to be approved by the third party creditor or creditors that have liens on the property. Short sales are often used as an alternative to foreclosure because they cost less to perform for both the creditor and the homeowner (borrower). Translation: short sales are a great way to get good deals on prime real estate.
Understanding The Application Process
The short sale process starts with the borrower applying for a short sale with the primary lender. Typically the lender will be a large bank like Wells Fargo, Bank of America or Chase. Once the borrower has requested a short sale, the lender will usually send a short sale packet to the borrower for the borrower to complete and return. This packet will require the submission of many financial documents:
- Previous 2 years tax returns
- Previous 2 pay stubs
- Previous 2 months of bank statements for all accounts (checking, savings, 401k, etc.)
- Hardship Letter
The realtor representing the borrower in the short sale process will typically collect these documents and work as the borrower’s representative to submit the paperwork to the bank and be a point of contact with any bank representative throughout the process. The bank will require a signed document that grants authority from the borrower to the realtor to act in their interest throughout the short sale.
By the time the property is marketed for sale the realtor and the borrower should be working with the bank to get the short sale approved. The bank will not be able to get full approval until a complete contract to purchase between the borrower and a buyer is submitted to the bank along with a settlement statement that reflects the agreement between the buyer and the borrower. Because the borrower stands to gain nothing from the sale of the property, the buyer will be waiting for the bank to approve the contract.
In Part 2 we’ll discuss the timelines of a short sale and expose some myths…stay tuned.