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Short Sale: What It Is And How To Complete The Process

Molly Grace7-Minute Read
January 18, 2022

Bargain-hunting home shoppers and other cash-strapped home buyers turn to short sales in hopes of finding a home priced below market value. It’s possible to get a great deal but the short sale process can be complex and lengthy.

If you’re considering buying a short sale home or short selling your own home, here’s what you need to know.

What Is A Short Sale In Real Estate?

A real estate short sale happens when a homeowner is struggling with financial difficulties and can no longer make their monthly payments. To avoid a foreclosure, the owner and lender will agree to sell the home for less than the remaining loan balance. Potential buyers may be able to purchase the property for a lower sale price compared to the current housing market since the mortgage lender is willing to take a loss.

The Short Sale Process

There are multiple steps in a short sale transaction and a delay in any of them can extend the timeline. That’s why it’s important to understand how the process works before entering into a short sale situation.

1. Obtain Lender Approval

Short selling requires a homeowner to initiate the process. Most lenders won’t provide a full approval for a short sale without an offer from a potential buyer. We recommend working with a real estate agent who’s had experience with short sale transactions. An agent who has worked through the submission process can save time anticipating next steps.

When considering whether they’ll allow a short sale to occur, the lender will look at a borrower’s current financial situation to determine if a short sale is the best option for them. This means that the homeowner will be required to provide proof of their hardship.

This may include writing a hardship letter and proving they have no other assets that could be used to make their mortgage payment. Reasons for hardship could include a reduction or loss of income, divorce, a long-term disability or serious illness of a co-borrower or their dependents, or death of a co-borrower.

It’s important to remember that mortgage lenders want to recover as much of the remaining mortgage balance as possible. An experienced real estate agent can help keep the transaction on track by pricing the home in line with its estimated market value, marketing it to a broader audience, and evaluating potential offers for the bank to consider for approval.

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2. Secure An Offer 

The borrower seeking the short sale is responsible for finding a potential buyer for their home. As we mentioned earlier, a real estate agent is key in this process. The home will likely be priced below market value, and they will be purchasing the house “as-is.”

With a short sale, there won’t be any special contingencies or credits paid to the buyer. The home will be sold “as-is,” meaning that what you see is what you get, with no room for negotiation on price due to repairs the home may need.

Buyers who are considering purchasing a short sale home should still have a home inspection and get estimates for repairs that need to be completed. Buyers who plan to finance the purchase should also obtain prequalification or preapproval from a mortgage lender prior to submitting an offer.

3. Present Package To Lender

Depending on the lender’s short sale process, the borrower may submit some information to their lender prior to receiving an offer, or they may wait and submit a full short sale package all at once after a potential buyer has made a written offer on the home.

If they’re submitting a short sale package, the lender will let the borrower know exactly what they expect that package to include. The borrower should expect to be asked for documentation of their current financial status including pay stubs, tax returns and bank statements, as well as anything that proves their current hardship, such as a termination letter, medical bills, a divorce decree or a death certificate.

Part of documenting hardship will include writing a hardship letter. In this letter, the borrower will detail the circumstances surrounding their hardship.

If they’re asking the lender to accept the short sale as payment in full and forgo their right to pursue a deficiency judgement against the borrower – meaning the borrower wouldn’t owe the remaining balance on the mortgage not paid for by the home sale – that is included in the letter. The lender may or may not agree to this.

Information about the buyer will likely be requested as well, like a preapproval letter or proof of funds, a copy of the purchase contract and their earnest money deposit.

4. Await Lender’s Decision

Once the short sale package is submitted, the buyer and seller will have to wait for the lender’s decision before the process can move forward. This can potentially take several months while the lien holder reviews the proposal and determines whether it makes sense for them to move forward, make a counteroffer or decline the proposal.

During this time, the lender will see if it makes more sense to allow the short sale or to begin foreclosure proceedings. Buyers who are shopping for a short sale home must be prepared to wait with no clear closing date. In a regular home sale, there are defined timelines and the response times are much quicker.

The Pros And Cons Of Short Sale Homes

Selling or buying a short sale home has its benefits and drawbacks. It’s important to research every step of the process and its potential outcome. Here are some benefits of a short sale transaction for your consideration:

  • A short sale causes less damage to the homeowner’s credit score.
  • If you’re a buyer, you could potentially pay less than market value for a home.
  • The short seller might have lower closing costs compared to a normal sale.
  • The lender doesn’t have to go through the full foreclosure process. 
  • The mortgagee might not have to pay back the full remaining balance if the lender decides to forgive the rest of the mortgage loan.

We also need to consider the disadvantages of a short sale. The following are some of the drawbacks of the short sale transaction: 

  • The short sale process takes longer than other types of home sales and sometimes buyers will back out of a contract if they find another house in the meantime.
  • Some lenders refuse short sales if they feel the homeowner has enough funds to continue paying the mortgage.
  • The homeowner may be stuck with the house longer than if the lender had foreclosed on their property, meaning they may rack up more unpaid mortgage payments.
  • The mortgage servicer might use a deficiency judgment to make the homeowner pay the rest of the loan after the short sale.
  • Buyers have to purchase the home “as-is” and cannot include contingencies in the contract.

FAQs About Short Sale Houses

The short sale process is more complex than the normal home buying process but one shouldn’t dismiss this option when thinking of purchasing a property or potentially short selling a home. Let’s learn more about the process with the following frequently asked questions.

Can Anyone Do A Short Sale? 

Most homeowners can request a short sale but not all lenders will approve them. A homeowner must prove their hardship by writing a hardship letter outlining the circumstances for the need to short sell the home. The homeowner will likely need to provide documentation of their current financial situation. This can include, but isn’t limited to, the following: pay stubs, tax returns, bank statements, termination letter, medical bills, divorce decree and death certificates.

Can You Do A Short Sale While In Foreclosure? 

Depending on the lender’s foreclosure process, a homeowner may be able to negotiate a short sale if they meet the lender’s criteria. Communication with the lender during this time is key to getting the best outcome available to a borrower.

Can You Finance A Short Sale Purchase? 

Buying a home through a short sale process is similar to any other purchase for the buyer. The biggest differentiator is timing. The short sale process tends to be longer and more tedious. Lenders tend to take their time processing the request because there are several departments and levels of approval that documents must flow through. Working with an experienced real estate agent who’s familiar with navigating lender requirements and document processing can significantly reduce the approval process time.

Because of potential delays in the process, some short sale home buyers find that their lender won’t lock their loan rate until the short sale is approved. If the interest rates fluctuate too much in that time frame, the borrower could potentially not qualify for their preferred rate or worse yet the home itself.

What Is The Best Way To Find Foreclosures And Short Sales? 

If you’re ready to start your search for a pre foreclosure or short sale, there are several resources you can use to find your next great deal.

Real estate agent: It’s best to work with a real estate agent who has experience helping buyers purchase short sales or other types of distressed properties. You might consider looking for a REALTOR® who has earned the National Association of REALTORS’® Short Sales and Foreclosure Resource certification. These agents have received specialized training to help those interested in buying foreclosed homes.

Bank websites: Many banks provide a searchable database of properties for sale on their website. The listings will likely have a few photos and the real estate agent’s contact information. There are banks that host online auctions for bank owned properties as well. Be sure to reach out to the agent or broker to discuss how your offer should be submitted and any other requirements to make the purchase.

Government-owned listings: The Department of Housing and Urban Development (HUD) lists homes with local real estate brokers and on their website. Listings provide photos and an agent contact. These listing will have a specific offer submission process as well.

County office: Contacting the county office of the community you’re looking to purchase a short sale home in is another source that’s often overlooked. Many counties have their foreclosure listings available online. They too will have their own process and procedure for purchasing a property from them. Some may only accept cash, so be prepared to pay for the property in full.

Listing service: There are companies that provide foreclosure listings for a fee. Many have monthly subscriptions with access to databases with homes approaching foreclosure to those ready to go to auction. 

If A Homeowner Is In Bankruptcy Are They Eligible For A Short Sale?

If a homeowner’s attorney or trustee contacts the lender asking for a short sale, the lender can consider a short sale. Prior to approving the short sale, the lender must obtain approval from the bankruptcy court.

The Bottom Line: Short Sales Can End The Foreclosure Nightmare

Though short sales are often complex and stressful in their own right, they can potentially be a helpful, last-chance loss mitigation option to homeowners who are facing foreclosure.

Waiting weeks for an approval can be hard on buyers who are anxious to get into a new home. But the effort can pay off big when buyers are able to purchase a home below market value. Learn more about home buying and how to get preapproved before you begin your home search.

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Molly Grace

Molly Grace is a staff writer focusing on mortgages, personal finance and homeownership. She has a B.A. in journalism from Indiana University. You can follow her on Twitter @themollygrace.