How to qualify for a short sale
In order to qualify for a short sale, a homeowner in distress must exhibit a financial hardship, have a monthly cash shortfall, and be insolvent and illiquid.
Although there are no concrete standards for these three criteria and exceptions and variations exist, it is important to understand the rationale behind them. Let’s examine them one by one:
Financial Hardship
Since the ability, or lack thereof, to comply with monthly mortgage obligations is directly related to finances, it is essential for a homeowner considering a short sale to be able to show a financial hardship that comes along with keeping the mortgage current.
Unemployment is one of the more common hardships in today’s short sale world. It makes it clear to everyone involved that the borrower is unable to make the payments due to lack of income. The decrease in pay associated with pay cuts or switching to a lower paying position also can put the family in the minus each month and thus allows the homeowners to prove the financial hardship.
There are also more subtle life events that can undermine the borrower’s financial ability to repay the mortgage debt. These may include increase in mortgage payments due to an adjustable interest rate or a re-evaluation of an escrow account by the lender resulting in higher mortgage payment due to higher property taxes or insurance.
Divorce and separation are also potential hardships that may qualify for a short sale along with job relocation and increase in household bills, such as medical.
Short sales on investment or non-owner occupied properties are also possible provide that the seller can show a negative rental income on both the monthly financial worksheet and income tax returns.
Of course there are other acceptable hardships that will allow a seller facing foreclosure to qualify for a short sale. Regardless of your situation, contact us today to find out if you qualify.
Negative Monthly Cash-flow
Ultimately, the homeowner will be asked to fill out a financial worksheet detailing all sources of income and all household and personal expenses, including the mortgage payment. The expense column should be higher than income in order to be considered for a short sale in most cases.
An exception may arise for someone who has to relocate for a job or an investor who lost a tenant has a vacant property in his hands. Although the overall monthly income may exceed the total expenses, the lender may consider a short sale provided that staying current on the mortgage will result, sooner rather than later, a significant depletion of financial resources.
It is essential for any homeowner with questions about a potential short sale to seek guidance of a local short sale specialist. Contact us today to find out if a short sale is right for you, and for a free and confidential short sale consultation.
Insolvency and Illiquidity
These two factors are often overlooked by both the real estate agents handling the short sale as well as the homeowners considering doing a short sale. Short sale negotiators working at the banks frown upon homeowners who have large savings or investment accounts or other significant assets that could be liquidated in order to avoid a short sale.
In some circumstances, the lender may not agree to do a short sale altogether if it believes that homeowners can make themselves whole. In other cases, the negotiator might ask for a promissory note or a cash contribution at settlement in order to allow a short sale.
In our experience, it is essential to consult either with an attorney or a short sale specialist before starting a short sale process to find out how other assets may impact that short sale itself and how the lenders may look at the borrowers after the file is submitted for review.
If you are considering short selling your home, contact us today to make sure that you qualify and for a free and confidential short sale consultation.