Short Sale Information

Short Sale Transactions

The real estate market runs in cycles. Presently, we are in an economic period in which mortgage delinquencies are on the rise. The primary cause of this is the combination of higher interest rates on mortgages and slow-down in residential real estate sales. Some homeowners with adjustable interest rates are particularly stressed as their payment amounts increase, stretching their budgets to the limit. In this climate, we can anticipate seeing more foreclosures, “distress sales”, and short sales. The information provided below will help you understand a short sale and how you can prepare for this transaction even before you begin the escrow process.


Q: What is a Short Sale?
Q: What types of property can be sold as a Short Sale?
Q: What are other alternatives exist to foreclosure?
Q: How does a Short Sale benefit a Homeowner?
Q: How does a Short Sale benefit the Lender?
Q: What are the First Steps for a Short Sale?
Q: What are some Short Sale tips for working with the Lender?
Q: What can expect during the Escrow Process for a Short Sale?

Q: What is a Short Sale?

The term “Short Sale” refers to a transaction in which the sales price will not generate enough money to cover the payoff of the Seller’s existing loan and closing costs. Working with a willing Lender, a Seller may be able to negotiate a payoff amount which is less than the actual amount that would ordinarily be required to payoff the loan. The Lender agrees to accept the equity available in the property, and the Seller receives no proceeds from the sale of the property.
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Q: What types of property can be sold as a Short Sale?

Most any type of property can be sold as a short sale. Principal residence, second or vacation homes, investment property, etc. are all possibilities. There are different criteria and ways of treating the transaction for different types of property.
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Q: What are other alternatives exist to foreclosure?

Outside of a short sale, another foreclosure alternative would be a Deed In Lieu Of Foreclosure. This occurs when a homeowner agrees to deed his interest of the property to the lender without going through the foreclosure process. This may happen when an acceptable short sale offer is not able to be negotiated with the lender.

If there are other financial difficulties in addition to the home and liabilities exceed income and assets, bankruptcy may be an alternative.
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Q: How does a Short Sale benefit a Homeowner?

A short sale will cause less of a negative impact on a borrower’s credit than the other alternatives. A short sale may allow the seller to buy a new home again in as little as two years. Of course, the borrower’s payment history following a short sale will make an impact in their ability to get a new loan and on the interest rate available. A foreclosure remains on your credit report for 10 years, and you may not be able to purchase another home for 5-7 years. Short sales are not reported on credit history. It will typically be reported as “settled for less”, “paid as agreed”, “paid as less than agreed”, or something similar. Current or future employers running a credit check will see a foreclosure, but they will not see a short sale.

Deficiency judgments may be negotiated between the homeowner and the lender in a short sale, and a good negotiator is often able to negotiate NO deficiency judgment. On the other hand, banks do not negotiate deficiency judgments after a foreclosure, and you will likely have a judgment filed.

A short sale allows you to stop foreclosure and get a fresh start. And although short sales and foreclosures are both much more common with the housing crisis and difficult economy, short sales also seem to have less of a social stigma.
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Q: How does a Short Sale benefit the Lender?

The lender benefits enormously because they get a quick, certain acceptable alternative to foreclosure without having the expenses of a foreclosure process, carrying costs of the property (taxes, insurance, maintenance, etc), costs of sale when listed as a REO sale. They quickly remove a non-performing asset from their books and immediately net more than they will likely get if they foreclose.
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Q: What are the First Steps for a Short Sale?

The agent and seller should start by having an extensive, truthful discussion about the Seller’s financial status. People who are in financial trouble may be hesitant to discuss the details of their unfavorable situation, but honesty and full disclosure are essential to the successful closing of a short sale transaction.

The seller should contact the lender to find out whether the lender is willing to consider a short payoff arrangement. The process of convincing a lender to reduce its loan balance to close the transaction is often challenging, requiring the negotiating skills of a seasoned agent. Be mindful of the additional work that short sales require of both the agent and the seller.

Ask your Escrow Officer to prepare a “net sheet” as soon as possible and update it regularly as information becomes available. This is a detailed estimate statement of the payoffs and closing cost that will be charged to the seller at the closing.
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Q: What are some Short Sale tips for working with the Lender?

Determine the lender’s guidelines. You can anticipate a very specific list of required documentation that begins with a copy of the Listing Agreement or some other form of written authorization from the seller.

Additional requirements may include:

– Strong evidence of financial hardships* to the lender
– Pay stubs or other proof of current income
– 2 years of Tax Returns and W-2’s
– Latest personal checking account statement
– Copies of all past-due secured and unsecured debt notices
– Copy of the latest mortgage statement
– Copy of a current tax bill, Copy of a current appraisal, including comparable sales in the area
– Copy of the Purchase Agreement

* Hardships may include a decrease in income, a death in the family, medical expenses, divorce, job relocation, neighborhood deterioration, etc. If your home is worth less than the unpaid balance due to the lender, and you have a hardship that makes it difficult for you to continue to make mortgage payments, it is likely that you will qualify for a short sale.
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Q: What can expect during the Escrow Process for a Short Sale?

The short payoff is a condition of closing that must be sent out in both the Purchase Agreement and Escrow Instructions. When the Lender’s payoff demand is received in escrow, it is likely to include restrictions on closing costs and payoff amounts to other Lenders and Creditors. Throughout the escrow process, the Seller and real estate agents should be proactive about the numbers that the Lender will see. Use the “bottom line” as the process unfolds. Your escrow officer can advise you immediately of any significant changes or discrepancies. Remember that the Lender will establish a minimum payoff figure which it is prepared to adjust, and its willingness to adjust that final figure may vary.
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Nations Title can handle all your Short Sale needs. Contact a Nations representative to learn more.