Sometimes you just can’t afford the home you bought. It’s more common than not after the year we had with COVID-19, in which many individuals have seen their income affected by the pandemic. When you owe more than the home’s value and can’t keep up with the payments, you likely think you’ll face foreclosure, and you might.
But there’s one more option that you could take – namely, a short sale.
The process may be tedious, but it can save your credit score from complete destruction. How long does it take and what should you know?
Read our guide below.
What Is A Short Sale?
A short sale is when you and the lender agree on an amount that’s less than you owe to satisfy a mortgage agreement. The lender will forgive the remaining balance, as long as they are a part of the sales transaction and have the opportunity to make up some of their funds that way.
At the same time, you can’t just list your house as a short sale and assume your lender will take it – they need to be with you every step of the way if this is the course of action you decide to use.
How Does It Work?
When a bank approves a short sale, they approve the amount you can list the home for, but it can be an intensive process to get there.
First, you must provide the bank with suitable paperwork proving you can’t afford your current loan repayments. Just like when you bought the home, you must provide:
- Paystubs for the last month
- 2 years of tax returns
- 2 years of W-2s
- IRS Form 4506
- A hardship letter signed by you
If the bank agrees that you can’t afford the loan, they’ll have you sign a listing agreement for the price they agreed upon.
You’ll sign some disclosures and work with a real estate agent to market and sell the home at a price that is set by the lender. It can take a few days to a few weeks to complete this step.
Here’s where the worst of the waiting process begins. You show the home like you would normally show a home, but when you receive an acceptable bid, you must send it along with your paperwork to the bank or lender. The lender then decides if they are willing to accept the offer or not, which could take between 60 to 90 days.
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What Causes Short Sale Delays?
The unfortunate part about short sales is there is a lot of lag time between the time of the offer and the final closing. Buyers sometimes back out because they can’t handle the wait or they decide they no longer want the home, which can make the process even more treacherous.
Lenders will often hold up the process when they aren’t happy with the offer. Remember, their goal is ultimately to recoup some of the funds they would originally have gotten from you, so they’ll be selective about which offer they want to accept.
If they don’t accept it, you and the buyer have to go back to the drawing board to draw up another offer for the bank and wait another 60 to 90 days for feedback depending on their backlog.
The Closing Happens Fast
The good news is once the lender does approve the offer, the rest of the process moves quickly. The lender will want to move fast once they accept an offer, so you may close on the home within a week or two after the long wait for the approval.
How To Speed Up The Short Sale Process
While there’s not much you can do to speed up the short sale process since a lot of the time is spent waiting on the lender to review, you can work with a reputable real estate agent to move faster.
Since most of your waiting is on the lender, working with a real estate agent who is experienced in short sales may help. They know exactly what lenders need to approve the short sale and what offers they will and will not accept. Having the right person on your team will make it easier to have the right supporting documents ready when they ask
Working with an inexperienced agent may leave you with a much longer wait time and even more lender denials – you need to vet the realtor you work with carefully and find out about their previous experience with short sales. If the lender turns down an offer, most buyers will walk away because they don’t have the time to wait months for another approval. Working with a professional can decrease the chance of this happening.
Bottom Line
If you want to sell a home via a short sale, work with your lender and a reputable real estate agent to streamline the process as much as possible. Look for someone experienced in short sales and who has had success with them in the past. With the market flooded with people who can’t afford their mortgage right now, sellers are waiting an extra-long time to short sell their home, but it’s worth it.
Dealing with a foreclosure is usually more damaging to your credit and your psyche than a short sale will be, even if there can be a long wait. Knowing you did what you could to pay the lender back what you owed provides a sense of peace of mind and leaves an extra 50 points or so on your credit report.
Do what you can to make good on your debt, but if push comes to shove, selling your home via short sale isn’t the end of the world and can even help you get out of a bad situation more lightly. In a couple of your years, your credit will bounce back and you will be back in the real estate game before you know it.