The Short Sale Process: Between loan modification or principal reduction, most lenders would rather you stay in your home than go into foreclosure. A common foreclosure alternative is a short sale. This is essentially the lender agreeing to accept less than the principal amount owed. For a homeowner, the impact on your credit report for a short sale is less than a foreclosure.
From the lender's perspective, the short sale process is very much the reverse of a traditional loan application. As much as the homeowner may want a short sale, they need to show the lender must approve it first. Once a homeowner decides on a short sale, they need to show the lender that they legitimately can no longer make the regular mortgage payments. The lender will ask for several items to justify a hardship, which includes pay stubs, tax returns, bank statements, and a hardship letter. A lender is not going to let a homeowner walk away from their property because they want to. You don't need to be three or four months late on your mortgage to get a short sale approved, you do need to show that there is, or will be, a financial hardship. Once all items are submitted to the lender, they will either accept the short sale application or reject it. If approved, they will move on to the property valuation part of the process
As is the case with any real estate transaction, the seller wants to walk away with as much money as possible. In a short sale, the lender is willing to sell the property at a discount, but they will not give the property away. To determine fair market value, they will either hire a local real estate agent for BPO (brokers price opinion) or order an appraisal. Nothing shows a property's actual value except listing it, but these methods will give the lender a good snapshot of what property is worth. If the property is not currently listed, the lender will recommend a price, and if there is an offer already in place, they will use this information to respond. AS with any listing, the more repairs needed, and the weaker the market, the less leverage the seller has.
Appraisals and BPO's are a subjective opinion. While these estimates of value are not exact, they do influence the lender's perception of the property's value and, ultimately, the price the lender is willing to sell the property for. Once the lender receives the report, they calculate the bottom line at which they're willing to sell the property. Negotiations between seller and lender begin at this time. As a seller pursuing a short sale, you can put yourself in an excellent negotiating position by partnering with a cash buyer and a short sale negotiator (real estate agent) who has experience negotiating distressed transactions. They can take the lead on your behalf and leverage their strategies to put you in the best position possible. As far as timeline, short sale negotiations have been significantly reduced but can still take several months to complete. If the seller agrees to keep the property in good condition and follows through on their promise, the lender will agree to and pay the seller a negotiated amount of money at the sale of the property.
Once the terms of the purchase are accepted, the closing is like any other real estate sale of property. At the closing table, the process is the same, just a little more paperwork for the attorney.
The Short Sale Process