A homeowner offers a short sale of his home because he can no longer afford the payments, and the home's value is lower than what he owes the bank. Short sales are a common remedy allowed by lenders to reduce the number of foreclosed homes in their portfolios. When short selling, you must be willing to wait for your lender to approve the sale in an often difficult and drawn-out process.
In a short sale, you sell the home for less than the amount owed on the mortgage. When you have a second mortgage or home equity line of credit, a short sale can involve more than one lender, both of which must agree to take a loss in the sale. Lender approval of the sale is voluntary and your ability to short sell relies on your bank's cooperation. If it denies the sale, you may relinquish the home by deeding it back to the bank or it takes ownership through foreclosure.
Many loans used to buy homes up for short sale provided the borrower low or no down payment requirements, meaning the loan covered all, or nearly all, of the sale price. Sellers also may have a large mortgage debt or multiple mortgages, because they refinanced or borrowed against their home during this time and obtained loans with temporarily low interest rates. Sellers often short sale to get out of volatile loan arrangements, which cause their payments to increase drastically, making the payment unaffordable. If you experienced any of these loan scenarios, your loan is likely underwater and you can probably qualify for a short sale.
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You must demonstrate that a financial hardship prevents you from repaying the loan. You may qualify to short sell if: you have recently lost your job or experienced a reduction in hours or wages; a serious illness or death of a borrower increased your monthly obligations or reduced your income; you are in a divorce or legal separation; you must relocate for a job transfer. Lenders may accept certain other circumstances if they are beyond your control. The key to proving you have a financial hardship is providing supporting documents, a detailed hardship letter and a list of expenses showing that your monthly obligations exceed you ability to pay.
Lenders typically require that your total monthly payments consume about 50 percent of your gross income to prove financial hardship. A healthy debt load, or debt-to-income ratio, is below 36 percent, according to Bankrate.com. To qualify for a short sale, you must also be at least 30 days delinquent on your loan and have failed to qualify for a loan modification. A loan modification changes one or more terms of your loan to make payments affordable. It requires a financial hardship and proof that you can afford new, lower payments.
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