What do Banks require of a Seller to qualify for a short sale?
Foreclosing is not something banks like to do. Enter the short sale option. An owner must qualify for a short sale with the bank, they are not just handed out to anyone who is underwater. A good way to think of this is that this is opposite of applying for a loan. When applying for a loan, the Buyer needs to prove that they have the ability to pay the loan back. When applying for a short sale, the Seller needs to prove to the bank why they can’t pay their loan back anymore. There are three main criteria that a borrower must meet to be eligible for a short sale:
- Hardship: The owner must be able to prove that there is some sort of hardship that is preventing them from paying their mortgage every month. Common hardships are loss of job, loss of income (perhaps one of the income earners in the house lost their job of took a cut in pay), job transfer, death in the family. There are plenty of other legitimate hardships of course, but it is up to the bank to determine if the hardship is acceptable.
- Underwater: You have to prove that the home is worth less than what is owed on it. If your home is not underwater, there would be no reason to short sell it. You would simply put it on the market and sell it.
- Insolvency: You must prove that with your current mortgage payment, there is less money coming into the house each month than there is going out with your mortgage and other debt obligations.
If you can prove all three of these things, most banks will consider a short sale, but it really has to be all three. Think of it as a stool with three legs; if you are missing any of the 3 legs, it won’t work.
Once you have been deemed eligible for a short sale, the negotiations will commence. Banks are not going to just take any offer that comes in. They have processes where they will send appraisers and real estate professionals out to the house to get their opinion on the value of the house so that they can determine if the offer is worth it to them to take in lieu of foreclosing on the house and selling it themselves. For example, if a bank is owed $500,000 on a house and they get an offer $100,000 to do a short sale, it would probably not be in the bank’s interest to take that offer if the market could reasonably yield them $400,000 if they just foreclosed on the house and sold it themselves. On the other hand, if they got an offer for $390,000 on that same property, they may decide that it is worth it to them to sacrifice the $10k difference because when they factor in how much time and the legal fees associated with foreclosure would mean to them, it will actually be a better deal or at least equivalent.