Navigating Short Sales: What to Do When the Sale Price Leaves You Short

If you're thinking of selling your  home, and you expect that the total amount you owe on your mortgage will be greater than the selling price of your home, you may be facing a short sale.  A short sale is one where the net proceeds from the sale won't cover your total mortgage obligation and closing costs, and you don't have other sources of money to cover the deficiency.  A short sale is different from a foreclosure, which is when your lender takes title of your home through a lengthy legal process and then sells it.

1. Consider loan modification first.  If you are thinking of selling your home because of financial difficulties and you anticipate a short sale, first contact your lender to see if it has any programs to help you stay in your home.  Your lender may agree to a modification such as:    

• Refinancing your loan at a lower interest rate
• Providing a different payment plan to help you get caught up 
• Providing a forbearance period if your situation is temporary 

When a loan modification still isn't enough to relieve your financial problems, a short sale could be your best option if

• Your property is worth less than the total mortgage you owe on it.
• You have a financial hardship, such as a job loss or major medical bills.
• You have contacted your lender and it is willing to entertain a short sale.

 2. Hire a qualified Team.  The first step to a short sale is to hire a qualified real estate professional* and a real estate attorney who specialize in short sales.  Interview at least three candidates for each and look for prior short-sale experience.  Short sales have proliferated only in the last few years, so it may be hard to find practioners who have closed a lot of short sales.  You want to work with those who demonstrate a thorough working knowledge of the short-sale process and who won't try to take advantage of your situation or pressure you to do something that isn't in your best interests.

A qualified real estate professional can:

• Provide you with a comparative market analysis (CMA) or broker price opinion (BPO).
• Help you set an appropriate listing price for your home, market the home, and get it sold.
• Put special language in the MLS that indicates your home is a short sale and that lender approval is needed (all MLSs permit, and some now require, that the shot-sale status be disclosed to potential buyers).
• Ease the process of working with your lender or lenders.
• Negotiate the contract with the buyers.
• Help you put together the short-sale package to send to your lender or lenders, if you have more than one mortgage) for approval.  You can't sell your home without your lender and any other lien holders agreeing to the sale and releasing the lien so that the buyers can get clear title.

3. Begin gathering documentation before any offers come in.  Your lender will give you a list of documents it requires to consider a short sale.  The short-sale "package" that accompanies any offer typically must include:

• A hardship letter detailing your financial situation and why you need the short sale
• A copy of the purchase contract and listing agreement
• Proof of your income and assets
• Copies of your federal income tax returns for the past two years

Reprinted from REALTOR® magazine (REALTOR.org/realtormag) with permission of the NATIONAL ASSOCIAION OF REALTORS® Copyright 2008.  All rights reserved.