The Complete Short Sale Process from Beginning to End
August 22, 2022
Since the beginning of the COVID-19 pandemic, housing markets across the United States have experienced significant growth in value. That incredible growth pace has begun to slow or even begin to decline in some markets. This change has been driven by central bank rates increasing which means higher mortgage rates, the highest inflation seen since the early 1980’s, fears of a recession, and other factors that may vary from market to market.
Ultimately, this means that some buyers may have purchased near the peak of the recent housing market and, unfortunately, find themselves unable to manage their significant mortgage payment. Or perhaps there are homeowners struggling with other costs like food and fuel. Whatever the case, that has led to an increase in foreclosures in the first half of the year.
A foreclosure can have significant, long-term effects on one’s credit and it is a lengthy process for banks to undertake. Homeowners wishing to protect their credit and avoid default have an option before foreclosing called a short sale. It presents an opportunity for both buyers and sellers. At Janus Title Agency, we help people navigate this process.
What is a Short Sale?
A short sale is a process by which a homeowner can sell their home for less than is owed on the home and have the unpaid, “leftover” amount forgiven or negotiated into a separate loan. It can be an intensive process, but it is preferable for sellers when compared to foreclosure. Banks may also prefer short sales to foreclosures as well because they can avoid the long, drawn out, and expensive foreclosure process.
Selling a home as a short sale is similar to how homes are traditionally sold, however, there are some important steps along the way to ensure the process goes smoothly.
Step 1: Determine Short Sale Eligibility
Banks tend to be eager to allow sellers to pursue a short sale, but there are some mitigating factors that need to be considered. For example, if someone co-signed a loan, a bank may prefer to have the co-signer make the mortgage payments if they are able rather than allow for a short sale.
In addition, short sales can be used for homes where the mortgage is still in good standing. The sellers may be in financial distress, but they have largely kept up with payments rather than letting their account go delinquent.
From a buyer’s standpoint, this is the time to get pre-approved for a mortgage if needed. A bank will only approve a short sale if the buyer qualifies. Getting the pre-approval step out of the way early can save time down the line.
Step 2: Partner with Professionals
A short sale is a real estate transaction and will require the expertise of industry professionals just like any other home sale. Both buyers and sellers will want to have real estate agents and their own real estate attorneys. Given some of the intricacies of a short sale, it’s imperative for both buyers and sellers to have a good team on their side that have experience with short sales.
For buyers that are seeking out short sale properties, a real estate agent can help narrow down properties to consider. In some cases, buyers may have already found a seller with whom they’re willing to work with.
Step 3: Due Diligence
Short sales are done “as-is” so there is a lot less recourse for a buyer later in the process should something go wrong. Specifically, this is the time to have a title search done on the home and ensure there are no surprises waiting once the deal closes.
In a short sale, it is expected to see the lender have a lien on the home for the amount of the original loan. A real estate attorney will have this lien discharged as part of the closing process. However, there could be other unexpected liens like builder’s liens or tax liens on the property that could be an additional cost for a buyer that moves ahead with the deal. Those liens will follow the property, not the owner who incurred the liens. With this information in-hand, buyers can then determine if they are still willing to move ahead with the deal and then pay to discharge the additional liens.
Step 4: Negotiate and Make an Offer
After doing your due diligence, it’s time for the buyer to make an offer on the property should you wish to proceed. There may be less negotiation room in a short sale because the bank will ultimately need to approve the offer and the bank is trying to avoid potential losses. This is where an experienced realtor can help immensely.
Step 5: Get Approval
After a seller accepts an offer and the buyer has pre-approval on a mortgage, the bank needs to approve and process the short sale. As part of this process, the seller will need to provide documentation proving financial hardship which could include a letter, income statements, tax returns, and other documentation as requested by the bank.
The bank will also need to approve the buyer which is why getting pre-approval at the beginning of the process is advisable.
This entire approval process can take some time and may require back and forth as new documents are requested and provided. It could be weeks or even months before the bank provides the final approval. For buyers with time and patience, it can all pay off with a great deal waiting at the end of the line.
Navigating the Short Sale
A short sale is a complex real estate transaction with its own unique pros and cons for both buyers and sellers. At Janus Title Agency, we help real estate professionals as well as their clients with processing all types of real estate transactions including short sales. Our experienced team has a diverse background spanning all areas of real estate.
To learn more about short sales and how Janus Title Agency can help, contact us today.