How to qualify for a short sale
Selling a property as a short sale can be an excellent option for a homeowner that owes more on their mortgage than the property is worth and they need to sell. There are many reasons that a lender may consider a short sale, which we explain in further detail below. In short, the lender wants to see that there is some form of hardship or reason, that the homeowner can no longer afford to keep the property.
What Is A Short Sale?
A short sale is when a property is sold for less than the amount needed to pay off the existing mortgage(s), the closing costs, realtor commissions, and any other liens attached to the property. In most cases, a short sale is used as an alternative to foreclosure.
Types of residential property that may qualify for a short sale:
- Single-family homes
- Vacation homes
- Retirement communities
- Multi-unit homes (up to 4 units)
- Investment properties
There are many misconceptions of what qualifies a seller for a short sale. The reality is that the qualifications are very simple and many times people that are worried they may not qualify are able to qualify for a short sale.
Following is an explanation of the three main items that lenders will evaluate in determining if you will qualify for a short sale. One important item to note is that often times you do not need to meet all three of these in order to qualify.
1 – Hardship
A hardship is a circumstance that is beyond your control that will cause you to miss payments on your loan or have financial difficulties. One common misconception is that it must be a financial hardship, which is not always the case.
One important item to consider is that a “hardship” is sometimes a matter of perception and does not always require a significant event in someone’s life.
For example, a job relocation out of state will qualify as a “hardship”. Former NBA star like Ron Artest, who bought a home for $1.85 million in Loomis, CA, and later sold it as a short sale for $1 million. The value of Artest’s home fell by almost half. He was earning $7.5 million when he bought the home. His income dropped to $5.85 million when he sold, which was a loss of approximately 23% of his earning power. That qualifies as a hardship even though he was still making a significant income.
Many lenders are no longer requiring any hardship explanation. If they do, below is a list of some sample hardships that qualify for short sale consideration. These items don’t necessarily need to have happened to you. It could be a family member that supports you, of someone who relies on you for support.
- Loss of employment or reduced hours
- Job transfer (voluntary or involuntary)
- Military service
- Death in the family
- Increased expenses and/or excessive debt
- Unexpected repairs or home maintenance
- Loss of income
- Major illness or medical expenses
- Divorce or separation
- Investment Loss
- Changing loan terms or loan payment increase (adjustable-rate mortgage)
- Inability to save for retirement
- Inability to refinance
- Declining market value
The lender will require that you provide a hardship letter as part of the approval process. The hardship letter is a letter that you write to your lender explaining why you are behind on your mortgage payments. The letter should give the lender a clear picture of your current situation and the reason that a short sale is required. The hardship letter is a normal part of the short sale process and is included with the full set of financial documents the lender will require.
2 – Monthly Shortfall
As part of the short sale process, the lender will want to see that you are either no longer able to afford to pay your current mortgage, or, you are in a situation that will eventually lead to your inability to pay your mortgage. An example of this would be someone that is relocated for work and they would not be able to afford to pay for their current mortgage and housing in their new location.
This will be documented on a “Financial Worksheet” or profit and loss statement. The worksheet will show all of your current expenses and income, and if changes are going to be happening in the foreseeable future, those will be documented as well.
3 – Insolvency
Insolvency is not required to qualify for a short sale, but it can be used as a qualifying hardship. Insolvency means that your total debts are higher than your total assets. In a situation of insolvency, the lender wants to see that you have no other means to pay down your mortgage and/or keep up with payments.
In this situation, the mortgage company wants to document that you owe more than you have in cash available to you, and you can no longer meet your financial obligations as they become due.
Do I Qualify For A Short Sale?
If you owe more than your home is worth, there is a very good chance you will qualify for a short sale. The most important part in getting a lender to approve a short sale is proper documentation. Our team has helped thousands of homeowners that have ranged from strategic short sales to severe financial hardships.
You need a real estate agent that understands the process and how to negotiate with your lender. Contact our team today to discuss your situation and find out if a short sale may be an option for you.