A common misconception is that anyone at all can qualify for a short sale and not have a valid reason for it, while the truth is that this is most likely the exception to the norm. Although you may know someone who had their short sale request accepted with no apparent reason or hardship, I would have to argue that 99% of successful short sales have what is called a “valid hardship”. A valid hardship is a valid and tangible reason why a homeowner cannot make their mortgage payments anymore. These would include but are not limited to the following:
- Job loss (Unemployment)
- Change in employment causing decrease in earned income (Underemployment)
- Divorce or legal separation
- Death of borrower or one of main income earners
- Medical illness causing extreme hardship due to excessive bills
- Long term disability
- Relocation of job far enough away that homeowner cannot commute
- Business failure
Simply not wanting to keep a home that is now underwater is not a valid hardship, or an accepted reason, for a bank or lender to agree to a short sale request. Also, if one of the above situations does not create enough of a hardship, the bank may also not agree to the short sale. If an individual earning a $200K per year salary is getting a divorce and has a $1,000 per month mortgage payment, the bank or lender will very well come back and let that homeowner know that they should cut down on their vacation and shoe shopping habit and continue to pay their mortgage….because they can definitely afford to do so.
The Invasive Short Sale Application
A short sale is a very invasive process, and the lender will require piles of personal information to be submitted with the short sale application. Upon hearing these requests, a homeowner may decide to not provide this information and choose to walk away from their home instead. Going through this process is typically lengthy, frustrating, and ultimately a huge test of one’s patience. In addition to the listing agreement & purchase offer, some of the documents a lender will ask for as part of the short sale process will include, but are not limited to the following:
- Pay stubs for the past 2-3 months
- Income statements for Social Security, disability, pension, unemployment, rental property leases, etc if applicable
- Bank statements for the past 2-3 months
- W-2 statements for the past 2 years
- Tax returns & attached tax schedules for the prior 2 years
- Hardship letter describing current situation
- Death certificate, copy of Trust, or other legal documents
- Financial worksheet where you outline your monthly income and expenses – including utilities, grocery bills, gas, etc, etc, etc.
- You may also be asked for a breakout of your assets and liabilities, including the amount you have in any savings accounts, CDs, stocks/bonds, retirement accounts, and personal property. An asset rich individual may not be approved for a short sale because they can afford to keep their home, but are simply choosing NOT to.
- Estimated HUD statement from your Escrow Company outlining the net income the bank will receive after commissions and taxes, escrow & title, etc are paid
- Check with your bank or lender to see what additional information they may ask you for!
Consult a Real Estate Attorney, a CPA, and a Realtor
When considering completing a short sale or a foreclosure, I always recommend that a homeowner speak with a real estate attorney to discuss their personal situation. A good real estate attorney will sit down and discuss the impacts to the homeowners life…including the impacts to their credit scores, possibility to purchase or obtain a loan again in the future, or even the impact to their careers! Yes, some careers may even be terminated over a foreclosure – so it’s imperative you know all the facts. My local real estate attorney referral for the Sacramento area would be Steve Beede. (See vendor page for contact info.) Steve has an affordable one time personal consultation where he will discuss your situation so you know how best to move forward. A short sale is not always the best answer for every homeowner…but neither is a foreclosure. As I mentioned above, an asset rich individual may not be approved for a short sale because they could afford to keep their home but are choosing not to. It’s best to consult with a real estate attorney, a CPA, and a realtor before listing your property. It pays to know the facts, figures, and impacts to you and your family.
Contact Your Lender for More Information
For more detailed information on your specific lender, check out these links to some of the major lenders’ short sale sites: