Expert Tips for Selling Your House as a Short Sale

In this blog post, I lay out step by step procedures for making a short sale. Why is it important to craft a well written hardship letter? How can you ensure that you walk away debt free after a short sale? What is the advantage of opting for a HAFA short sale? Read on as we discuss these and many more important topics pertaining to a short sale.

The Many Advantages of Making a Short Sale

A short sale is a harsh reality that many home owners experience. While giving up possession of your home is a painful experience, a short sale is better than opting for a foreclosure. Short Sale, also known as pre-foreclosure is for those who cannot afford to make their mortgage payments.

Short Sale has many advantages as compared to a foreclosure. For starters, you can stay in your house till the end. This can save you a good amount of rent. Availing relocation expenses is another advantage that you can avail. Relocation expenses of up to $3K are available. Another reason for preferring a short sale is because it is less harmful to your credit as compared to a foreclosure.  In rare cases, you can also have your bank forego the deficiency amount.

Step by Step instructions to make a short sale

Evaluate your Options

Start off by researching the effects of a short sale. You do not want to resort to a short sale unless you have no possible hope of coming out your financial mess. What will be the effect of a short sale on your credit score? Are you in a two mortgage situation? If yes, how will you deal with your secondary lender? These are the questions that you need to answer before you kick start the short sale process.

Gather Your Financial Information

Once you have made up your mind, you need to gather all your financial information and organize it. Make sure that you have all your loan papers. Print out your pay stubs. And gather all your monthly debt information which includes credit card bills and car payment information. These documents, properly organized will help convince the lender about the authenticity of your situation.

Enlist the Help of a Good Real Estate Broker

Making a short sale is a long tedious process that may take as long as six months. You do not want to make any wrong moves that will jeopardize your already precarious financial position. Enlist the help of a good real estate broker who has the right mix of experience and knowledge.

Explain your Current Situation

You need to come up with a carefully drafted hardship letter. This will exponentially increase your chances of making a short sale. Remember – you HAVE to keep your emotions in check. Draft your letter keeping a rational bend of mind.

First of all, you need to articulate the fact that your future is completely bleak. The bank/lender needs to be convinced that you cannot resume payment of your mortgages at any point in future.

Understand that the bank has multiple short sale applications just like yours. And they are likely to approve a short sale where they have zero hope of mortgage continuation. The lender should be convinced that your home will slide into a foreclosure if a short sale is not commenced.

You also need a plausible reason to ensure that your short sale goes through. So, loss of job or a death in the family are strong reasons that can help your cause. Someone with flippant spending ways who has just racked up credit card bills is not likely to find much sympathy from the lender.

Keep your letter brief and to the point. And AVOID using a template. A handwritten letter will lend a nice personal touch which can really push your cause further.

What to include in a hardship letter:

• Your address
• Multiple contact numbers
• Your Loan application number
• Repairs required

Contact Your Lender

Once you have all the documentation in place, get in touch with your lender. Good documentation gives you an edge over others and increases the chances of your short sale goes through.

Selling your house as a short sale is quite similar to a conventional real estate transaction. Yet, there are some differences that you should be aware of. For instance, in a two mortgage situation, you will have to negotiate with your secondary mortgage holder as well. And once you receive a firm offer, you will have to contend with the buyer’s agent as well as your mortgage lender to push the sale through. Be prepared for lengthy proceedings – some short sales take even 120 days to go through.

Common mistakes to be avoided in a short sale

Negotiate the waiver of deficiency

If you do not come out debt free after making a short sale, the very purpose of making a short sale is defeated. So, it is important that the lender does not claim the loan deficiency amount from you.

In certain states like California, it is against the law for lenders to claim the loan deficiency amount from their borrowers. Unfortunately, this is the exception rather than the rule. A sure shot way of avoiding this situation is to route your short sale through the Home Affordable Foreclosure Alternatives Program (HAFA), FHA or FHFA. However, your lender might not agree to go this route and they might have their own internal rules.

If your approval letter does not explicitly state the waiver of the deficiency balance, you ARE still responsible for the loan shortfall amount.

So, how do you calculate your loan deficiency amount?

Let us say you paid $300,000 for you house. But now it is worth $250,000. If you still owe $200,000 on your mortgage, then the shortfall is $50,000. If we presume closing costs of $20,000, this means that the total deficiency is $70,000.

Thus, Loan Deficiency Amount = [Outstanding Loan Balance] – [Sale Price of house] + [Closing Costs]

Do not stop paying your HOA fees

A short sale home needs to be in reasonable condition so that the subsequent owner can move in. Skimping on your HOA fees will only cause unpleasantness and might even cause the buyer to walk away.

Conclusion

Selling a house as a short sale is a painful and emotional experience. It is important that the homeowner keeps a rational and systemic approach. This will ensure that an already precarious financial position is not endangered further.