Selling a house in a short sale is a positive alternative to foreclosure, better for both the homeowner and the lender. A short sale involves the sale of a home for less than the total balance owed on the mortgage. The lender agrees to accept this partial payment as full satisfaction of the debt in order to avoid foreclosing on the home and being forced to sell the house itself. The homeowner benefits because he avoids foreclosure and, in most cases, can also negotiate an agreement with the lender to avoid a deficiency judgment.
The Selling a House in a Short Sale Process
Homeowners who wish to avoid foreclosure through the use of a short sale should generally contact the bank before they have an offer on the home, and even before they list the home for sale. Many banks have special short sale programs in place that homeowners may enter into in order to streamline the process, but even if you do not qualify for or have a program available to you, early communication with the bank is key to getting a short sale approved.
When you contact the bank about selling a house on a short sale, you should be ready to show why you cannot afford to keep the house and continue to make payments. You may need to provide the bank with:
- A financial hardship letter explaining why you can’t make payments.
- A financial statement showing your current assets and liabilities
- Tax returns, pay stubs and bank accounts that prove the truth of the information listed on your financial statement.
You may also need to provide the bank with a list of recent comparable sales or a professional market analysis to show why your home will need to be sold for less than the balance due.
Some banks will approve a short sale price at the time of the application or when you enter into a program, while others will approve selling a house in a short sale but wait until you have an actual offer on the home to assess the value of your home and the offer received to determine if the sale is acceptable at the offered price.
Getting an Offer
If your bank has approved a price prior to listing the home and you receive an offer for that amount, you should notify the bank and begin the process of closing on the home. This will involve the prospective buyer sending over preapproval information, an earnest money deposit, and a purchase offer. The bank reviews this information to determine if the sale can go through. This process may take several months depending on your particular bank.
If your bank has not approved an offer prior to the home being listed or if you did not obtain approval for selling a house in a short sale before an offer is made, then the process of getting the short sale approved will take longer. The bank will still go through similar steps, reviewing your financial information, the fair market value of the home and the buyer’s offer, but it will be doing all of these things while the perspective buyer waits.
Many buyers will be more reluctant to enter into this type of agreement because of the lengthy waiting periods and because of the uncertainty as to whether the bank will approve the short sale or the offer. As such, it is usually best to obtain approval- at least of the act of selling a house in a short sale – prior to listing the home and finding a buyer.
Avoiding a Deficiency Judgment
In certain states, a bank may come after you to obtain a judgment for the remaining balance due on a home if the sale of the home did not repay the full amount due. This is called a deficiency judgment and can happen after either a foreclosure or a short sale. To avoid having the bank try to collect any unpaid balance, it is important that the bank agree in writing not to pursue a deficiency judgment against you as part of the short sale agreement. This is the best way to protect yourself and to make sure that the sale of your home is the end of your obligations.