What is a short sale?

A short sale occurs when you owe more than the fair market value of the home, face a demonstrable financial hardship, and need your lender's approval to close escrow.  If you have more than one loan on the property, such as a first mortgage and a home equity loan, each lender will have to approve the transaction.

Why must my lender(s) approve the transaction?

A mortgage loan, home equity loan, and other secured loans are all liens against the property; in order for title to the property to pass to the buyer, those liens must be satisfied.  Therefore, getting your lender(s) to accept less than it is owed is a critical step in a short sale.  For your lender(s) to accept a short sale, you must demonstrate a financial hardship and inability to pay back the full amount of the loan(s).  In a sense, this is like "reverse qualifying" for your loan(s).

What will I have to do to get short sale approval?

Depending on the lender(s)'s requirements, you will need to provide a hardship letter detailing why you are unable to pay the difference between the fair market value of the home and the loan amount(s).  You may have to provide bank statements, tax returns, financial statements and other documents to prove that you do not have the ability to pay off the loan.  You will have to sign an authorization letter, allowing the lender(s) to speak directly with your real estate agent to facilitate the approval process.

What happens after my agent receives an offer?

The offer will be presented to you, and if you want to accept the offer, your agent may draft a counteroffer or addendum containing "contingency" language.  That is, you are willing to accept the offer, but the deal will not be final until your lender(s) approves of the transaction.  Then, your agent will submit the signed contract, including any counteroffers and addenda, to the lender(s) along with other documents that the lender(s) may require.

How long will the process take?

It depends on the lender's workload and requirements.  Sellers and buyers must be prepared to wait at least two to three months for the seller's lender(s) to approve the transaction.  Remember that after the lender(s) approves the transaction, other contingencies may have to be met (home inspections, buyer's loan qualifications) before the transaction actually closes.  Your lender(s)'s approval is only one piece of the puzzle.

Why does it take so long?

Lenders are flooded with short sale requests.  Multiply that by the amount of paperwork required to process and approve a short sale and you have a backlog.  No one, including the Brokers and Agents involved in the transaction, can control your lender(s)'s approval.

Will the house stay on the mark?

If the property is listed in the Multiple Listing Service (MLS), it will be placed in "Contingent" status, meaning that a purchase agreement has been executed, but the deal is awaiting short sale approval.  As a practical matter, listings that are in contingent status come up in property searches, and it is possible that another buyer will see the house and make an offer.

If my lender(s) agrees to the short sale, do I still owe the difference?

It depends on the lender.  You may receive a deficiency judgment for the difference between the amount of the sale and the amount of your loan(s), which you will still owe.  The lender may forgive the debt, and the IRS may treat that as income.  There may be consequences on your credit report and score.  You should seek professional advice from an attorney, certified public accountant or other professional as to the credit, legal and tax consequences of a short sale.

What about forclosure?