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Prepare for a Successful Short Sale

If you're struggling with a monster mortgage and the threat of foreclosure, you don't have to walk away from your investment. Before you read any further, contact your bank. You may be able to work out a deal that will make payments manageable and allow you to keep your home. There are also some HUD programs that can help you hang in until the market catches up. Once you've exhausted these options however, you can still rescue your credit rating and emerge relatively unscathed by negotiating a short sale:

In order to qualify for a short sale:

  1. A loan must be in default two months or more
  2. The house must be worth 63% or more of what's owed and sell for 82% or more of the appraised value
  3. The house must sell within three to five months
  4. The lender must be convinced to assume the cost of the short sale

Making Your Case

If you qualify, convincing the lender to agree to the short sale will be the most important part of the process and having all the paperwork in order is essential. The following is a list of documents you'll need to present in order to make your case:

  1. Letter of Authorization - LOA
    The letter of authorization is required by the lenders to confirm that they're authorized by all borrowers to release information to the negotiating party. You can download an LOA form from the North American Title Company here

  2. Hardship Letter
    The hardship letter is the homeowner's opportunity to state why they need relief from their mortgage. It's important that the letter is legible and preferably typed

  3. Financial Statement
    The lender wants to review the homeowner's monthly income and expenses to determine the significance of financial hardship. The information provided should be:
  • Only regarding borrowers on the loan
  • Reasonable (if amounts allocated for groceries or entertainment seem out of line, the lender may question that item and other parts of the file.)

Review the financial statement before submitting it. Most lenders accept the Freddie Mac Financial Statement but there are exceptions. If there will be multiple lenders discounting a loan, more than one financial statement may be required.

  1. Bank Statements
    The lender wants to see two months of banking activity for all borrowers on the loan. The homeowner will need to provide two months of statements for all non-retirement accounts, including bank accounts, brokerage and mutual funds. The statements must be:
  • As current as possible
  • Covering consecutive months

NOTE: Bank statements frequently need to be updated if the short sale process goes over 90 days.

The lender will require at least one month of pay stubs for each borrower on the loan. If a borrower has more than one job, pay stubs for all jobs should be included. It's a good idea to provide two months of pay stubs from each borrower. This helps the lender get a complete view of the homeowners' financial situation. If the pay stubs are disability checks, the lender will want a copy of the disability "awards letter" which outlines the terms of the disability income.

  1. Tax Returns
    The lender will want to see two years of tax returns for each borrower on the loan. Please provide the federal returns for the two most recent years (late filers should include a signed and completed extension form). Always include all pages and applicable schedules for each tax return

  2. Purchase Contract
    Please provide a "clean" fully executed copy of the purchase agreement accepted by the homeowner. Include all counter offers and addendums

  3. Estimated HUD Settlement Statement
    The lender will work with the estimated HUD provided, so review it carefully before including it in this package. Do not rely on the escrow officer to properly interpret this contract. If the estimated HUD is to include estimates for delinquent property taxes, repairs, expenses and fees on a senior lien, allow some room in your estimate in case cost income is higher or it takes longer to close escrow

  4. Listing Agreement
    A lender will want to see a fully executed copy of the listing agreement. Make sure the commission section has been completed. Regarding commission, keep in mind that the lender may want to negotiate

  5. Price History
    The lender will want to know that every reasonable effort was made to maximize their recovery of capital. in many cases that means graphically demonstrating to the lender that the property was offered for sale at a price or at prices above the list price at the time an offer was received and accepted. The price history chart should include:

    • List date and dates prices were changed
    • Number of days at each price
    • Each price at which the property was offered
    • The number of showings at each price
    • The number of offers at each price
    • The amount of each offer

  6. Broker Price Option
    The lender will want the Realtor to provide a simple and accurate BPO which states their estimate of the value for the property. If possible, use comps within a 1/4 mile radius and attach copies of MLS printouts


    This list was adapted with permission from a document by the North American Title Company


If you're interested in learning more about short sales I encourage you to call me at 530-601-6168 or send me a message anytime. I have a great deal of experience negotiating this kind of transaction and can help you determine if it's the right choice for you.