When a property owner cannot keep up with mortgage payments, he/she can either file for bankruptcy or go through foreclosure proceedings. The third option is to short sell a house.
What Is Short Selling a House?
Short selling a house happens when a lender allows a distressed property owner to sell the home for less than the amount due on the mortgage. For example, you could sell your house for $200,000 when the outstanding balance on the mortgage is $230,000. The proceeds of the short sale will go to the mortgage lender, while the balance of $30,000 would be waived in most cases.
Selling your house as a short sale would be an ideal option if:
- You are not eligible to modify or refinance your mortgage
- You are falling behind on your mortgage payments
- You are dealing with a long-term hardship
- You owe more on your investment property than it’s worth
- You cannot afford to maintain your home
Mortgage lenders usually agree to short selling a house when foreclosure is imminent. When a short sale happens, the lender will not have to repossess the home and bear the costs of maintaining it until a buyer is found. In addition, short selling a house helps avoid the risk of selling the home at a much lower price in a foreclosure auction.
So a short sale seems like the better option for the lender. But what about for the homeowner? Is it better to do a short sale or foreclosure? Short selling a house is the better option for the following reasons:
- Protects your credit – A foreclosure on your home will have a negative impact on your credit. This will make it difficult to borrow money for any other major purchase. Short selling a house helps you avoid foreclosure, thus protecting your credit.
- Saves money – A foreclosure home selling process could cost a homeowner thousands of dollars in legal fees. Short selling a house will save you this financial burden.
- Saves time – Short selling a house helps you avoid the long and stressful foreclosure process.
- Benefits the housing market – When a neighborhood has multiple foreclosed homes, the property values usually drop drastically. Short selling a house protects other homeowners from losing the equity they have built in their homes.
- Helps avoid scams – Numerous scams related to foreclosures have been reported in recent years. You can avoid falling prey to opportunists by opting for a short sale.
How to Short Sell a House
How does short selling a house work? Here are the steps for selling your home as a short sale:
1. Determine the value of your home
The lender will only allow a short sale if your home has enough equity to guarantee a good selling price. Therefore, the first step in a short sale should be to get a valuation analysis for your property. You can determine your home value by conducting a comparative market analysis (CMA). This involves analyzing similar homes in the neighborhood (real estate comps) to establish your property’s current value.
Start your comparative market analysis by collecting data about your property. This includes details such as location, square footage, acreage, number of bathrooms and bedrooms, year built, unique features, and recent renovations. Once you have this information, you can then look for comparable properties in the same area. To get an accurate valuation, look for real estate comps that were sold in the last three months or less. You can get a list of comps for your property here on Mashvisor. Learn how to add your listing to get this data.
Another factor to consider when valuing your home is the quality of the neighborhood. In your evaluation, look for things such as:
- Proximity to schools, hospitals, public transport, beaches, etc.
- Proximity to undesirable locations like industries and garbage dumps
- Curb appeal issues
Property valuation can be a very tricky process, especially for beginners. This is why it would be advisable to work with an experienced real estate agent who can guide you when short selling a house. Find a great real estate agent here.
2. Obtain a hardship letter
Besides the value of the property, the lender will also want to know why you must sell your home. You will, therefore, be required to submit a hardship letter explaining why you are unable to make mortgage payments. The lender should be convinced that the hardship is something that cannot be sorted out in the near future. This could be the death of a spouse, an uninsured loss, a serious illness, divorce, or unemployment. The letter should also include information about your current income, assets, and the debts you owe. To support your claims, you will need to submit documents such as bank statements, payroll stubs, recent tax returns, credit card statements, and proof of illness or death.
3. Submit a letter of authorization
Lenders will not start talking to real estate agents, potential cash buyers, or real estate investors unless they have authorization from the property owner. The letter of authorization should include the following details:
- Your name
- Property address
- Loan reference number
- Your agent’s name and contact details
- The date and effective time period
4. Prepare the sales contract
Once a willing buyer has been found, you can then prepare a sales contract or sales purchase agreement for the lender to approve. Be sure to include proof of the buyer’s ability to buy (like a pre-approval letter from his/her lender) and a copy of the listing agreement with the real estate listing agent. An affidavit might also be required to show that the buyer and seller don’t have any prior relationship.
If all goes well, the lender will give your short sale a go-ahead. As part of the deal, you could ask the lender not to mention you adversely to credit reporting agencies.
Since short selling a house could take weeks or even months, you will need to be very patient. You should also consider getting legal advice from an experienced real estate lawyer to avoid pitfalls along the way.