Basics of a Short Sale Transaction

With more and more homes going into foreclosure, I thought you might need to find out a little more about the “Short Sale” process. This can ultimately prevent a foreclosure and is less harmful to your credit.

What is a Short Sale or Short Payoff?

A short sale occurs when a lender allows a property to be sold for less than the existing loan balance. A negotiated short sale may result in a discounted purchase price for the buyer who would finance the property much the same way as in any conventional real estate sale.

When a lender agrees to take a discounted payoff, a seller is typically in default of their mortgage. There may be instances, however, where there is no default like in the case where the loan balance exceeds the value of the home.

Negotiating a Short Sale

A number of factors go into a lender’s decision of whether or not to discount a loan, and if so, by how much:

  • The seller’s overall financial situation
  • The property’s “as-is” value
  • The cost to put the property into resale condition
  • The property’s “as-repaired” value
  • The cost of securing and maintaining the property while it’s listed on the market
  • The cost of marketing and selling the property

Factors that may lead a lender to report to a short sale include:

  • A property purchase in an inflated market that has experienced a significant downturn
  • A property located in an area where home values have dropped, or the value has decreased to a point where the loan is “upside down”
  • A property refinanced at more than 100% of its value
  • A property whose condition has deteriorated to a point where it would require extensive repairs to make it marketable

Hardship Test

A lender will require a seller to pass a stringent hardship test before they will approve a short sale. The seller must be experiencing one or more of the following hardships:

  • An illness or injury in the immediate family which has wreaked havoc on personal finances
  • A spouse has died or a divorce has occurred and there is insufficient income to pay the loan
  • An employer has transferred the seller out of the area, and they’re unable to sell or rent the property
  • A seller has been called away to active military duty for an extended period of time and lacks the income to pay the loan
  • The seller is unemployed and has no expectations of finding employment due to local economic conditions beyond their control
  • The seller has been incarcerated and no longer has the income to pay the loan

It’s important to note that the company servicing the loan currently in default, isn’t authorized to approve a short payoff sale. Final approval must come from the investor who owns the loan. Oftentimes, it can take between one and six months to negotiate and close a short sale, depending on the lender.