A short sale is defined as a real estate transaction which the lender or Mortgage Company allows the homeowner or seller to sell their home for less than the amount owed on the home. There are several factors in deciding if a short sale home is beneficial to both parties involved.
One of the most important aspects of a short sale home is whether the homeowner has a true hardship. A job loss, divorce or illness typically qualifies as a hardship. The homeowner who owes more on their home than it’s worth but hasn’t had any difficulties in terms of income or change in family status most likely will not qualify for a short sale.
Once a hardship has been recognized, the homeowner puts together a financial package, also referred to as a short sale package, similar to when they purchased their home. Tax returns, bank statements and pay stubs are the most commonly requested items. This short sale package gets submitted to the homeowner’s lender once an offer or contract from the buyer to purchase the home has been received and accepted by the seller.
Once the short sale package is submitted to the lender, the lender will order an appraisal to determine fair market value of the home. Current market value is based on comparable properties in the same neighborhood, the general condition of the property and the current real estate market in general.
After an appraisal is completed, the short sale is assigned to the lender's loss mitigation department. Loss mitigation is responsible for verifying all the documentation submitted on behalf of the seller, the appraisal and most importantly, the offer. The bank typically doesn’t want to sell the home for less than 90% of the appraised value.
Once the offer is accepted by the bank, Mortgage Company or lender, a letter is drafted outlining the specific parameters the bank requires in order to close the transaction. This approval letter also known as the agreement notice, must then be reviewed and signed by the homeowner or seller. The seller must also approve of the requirements set by the bank in order for the sale to proceed.
The timelines for a short sale vary by each bank. A small local bank or credit union may only take one or two weeks. The larger banks can take up an upwards of 6 months before the seller and buyer receive any type of response from the lender. If there is more than one mortgage on the property, this too can delay getting a response as bank number one and bank number two have to agree to the terms set forth by the other one. This timeline and short sale process starts from the beginning if one buyer cancels the contract and another buyer steps in with a new offer.
Most lenders will pay for buyer’s closings costs on an FHA loan but typically will not pay for home warranties, repairs to the property or fees that they do not feel are customary to a regular real estate transaction. Many lenders will also not pay for any HOA fees or Homeowner's Association fees that are in arrears. This could be very costly and should be an important concern to a buyer.
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