What Factors Does a Lender Consider When Reviewing a Short Sale Request?

When a homeowner is behind in mortgage payments and owes more than the house is worth, a short sale can be an effective alternative to foreclosure.  In basic terms, a short sale is the sale of real estate where the lender agrees to accept less than the amount owed on the mortgage as part of an agreed upon sale.  Although every lender has its own standards, a lender will generally approve a short sale request, if all of the following conditions are met:

  • The price requested by the owner for the short sale must be fair and represent the true market value of the property.  The value of the home is usually a much more important factor than the amount owed by the homeowner seeking the short sale.  The lender will verify the market value by obtaining its own appraisal of the property or broker price opinion (BPO).  Although most lenders do not want to foreclose a homeowner’s property, they also will not take much less than the property is worth.  An offer of at least 90% of the lender’s perceived market value is usually sufficient to obtain short sale approval.
  • The owner must not have the financial means to pay the balance of the mortgage.  The mere fact that a property owner is behind in mortgage payments and that the property value is worth less than the mortgage owed, is not sufficient for a lender to agree to a short sale.  The lender will need proof that the owner does not have the financial ability to pay the shortfall.  If an owner has the means to pay the shortfall, the short sale will not be approved.  A hardship letter and financial statement, as well as supporting financial information such as tax returns, pay stubs, W-2’s and bank statements will all be required.
  • Fully executed contract of sale showing a ready, willing and able buyer.  The lender will generally not approve a short sale request unless the owner already has a buyer ready to purchase. The lender will also require a copy of the listing agreement with the real estate agent to demonstrate that the house was listed for sale and the owner tried to get the highest possible sales price.
  • In most circumstances, none of the proceeds from the sale can go to the seller.  If the owner wants to be able to sell the house without paying the lender in full, then the lender will usually not allow the buyer to receive any proceeds at closing.  One exception to this general rule is if the owner can get approved under the government’s HAFA program which often allows an owner to receive up to $10,000 at closing.
  • Proposed HUD Settlement Statement.  The lender will want to see exactly how much it will net from the proposed short sale before it agrees to the short sale request.  Your attorney will prepare a preliminary HUD closing statement and include it in the package being sent to the lender.  The lender will want to see that all of the closing costs are reasonable and that nobody is getting any funds that could be going toward the mortgage.

The Law Offices of Seth J. Arnowitz, LLC represents individuals throughout Fairfield County, Connecticut in foreclosure matters including short sales.   For more information about whether a short sale may be an appropriate option for you, please contact Seth J. Arnowitz by phone at 203-348-7722 or e-mail at web2@ctattorney.com.