If a lender agrees to consider a short sale, they will most likely send the owner/borrower a "short sale package". Not every lender requires a complete "Short Sale Package" nor will they all require the same documentation. However, you should be prepared to generate (or facilitate) these basic elements:
- Cover Letter
- Authorization to Release Information
- Sellers Hardship Letter
- Seller's financial information - most lenders have a form for this however you can have seller's fill out a generic form (similar to a mortgage application) so they have all the information ready to transfer to the lender's form.
- Supporting Financial Information:
- 2 years w2's
- 2 years tax returns
- 2 to 6 months pay stubs
- 2 to 6 months bank statements
- Supporting Hardship info - for example HOA liens, medical statements, disability statements
- Repair Estimate for the property - if you can get certified contractors for this it adds credibility
- Comps for the property
- Contract(s)
- Preliminary HUD-1 or Net Sheet
Cover Letter. The cover letter should be clear and concise giving the needed information to the lender. This typically includes an overview of the homeowner's situation, what they owe on the property, what it is really worth, and the amount of any necessary repairs as well as any offer amounts. The cover letter should include the contact information of all relevant parties (seller, realtor and any buyers if applicable).
Authorization to Release Information. There are lenders that require their own form for this but most will accept a standard authorization. It doesn't hurt to have it notarized.
Seller's Hardship Letter. The goal of this letter is to have the homeowner explain his situation to the lender, including key items such as job loss, medical issues, divorce, and health issues. If the seller is considering bankruptcy, he should include that, but only if he truly intends to file. He will most likely have to back up this threat with proof, such as a letter from his bankruptcy attorney.
Seller's Financial Information. The lender will use the same type of information to qualify the seller for a short sale as they do to qualify him for the loan in the first place. However, now the goal is the opposite - they need to prove he CAN'T afford this home. You can usually start with standard forms similar to a credit application showing both personal information and financial information. The lender will usually ask for:
• 2 years W2's
• 2 years tax returns
• 2 to 6 months pay stubs and
• 2 to 6 months bank statements
Supporting Hardship Info. This is written by the seller explaining in the seller's own words why they cannot meet their obligations at this time (or any time soon) and how they got in this situation. The seller will need to show proof of the hardship. This can include medical bills, accident reports, a layoff notice, or other documentation.
Repair Estimate For The Property. Providing the lender with a detailed repair estimate from a reputable contractor will assist greatly in getting the short sale accepted. Providing a description of any deferred maintenance such as a roof or a/c system near the end of its life expectancy or an outdated electrical or plumbing system is also helpful. The lender particularly doesn't want property that will need immediate attention.
CMA. Provide the lender with at least 3 to 5 comparisons of properties in the area that have sold in the last 12 months, preferably the last 6 months. It is also helpful to be able to show the number of days on the market and any and all down payment assistance, upgrades or seller concessions given in the comparable sales. It doesn't hurt to include desktop estimates compliments of your preferred lender, or a BPO (business process outsourcing) from your broker.
Listing. It may be difficult to get a lender to accept a short sale on a property that you haven't even tried to sell at full price. Typically, you need to list the property for at least some period of time. You can list it for the mortgage balance with the notation that the seller is negotiating with the lender for a short sale and ask for buyers to make written offers.
Contract. The lender will typically request all offers in writing and will almost always require an "As Is" contract with the bank offering little or no assistance to the buyers. The lender will usually require all offers include a copy of the earnest money deposit from the buyers as well as Proof of Funds on Cash offers or Mortgage Prequalification or PreApproval for those seeking financing.
Preliminary HUD-1. Lenders want to see how much money they are going to net with the suggested sale price. Here are some points to note:
- The preliminary HUD-1 should be clearly marked as "Estimated"
- You may need longer for closing. For example, it is not unusual to set the closing date at 45 or even 60 days from the date of acceptance.
- Earnest money amounts may be set by the lender, and are typically at least $1500.
- There should be no cash to the seller. This column should always show $0.
- Include all closing expenses, title search, closing agent's fee, doc stamps, termite inspections, etc...
- There should be no excessive processing fees, large commissions, etc... (check with the lender to see if they have specific limits on these fees)
Additional Information. Typically if a lender requires additional information, they will let you know what it is. The most common is the request for the payoff amounts from the other lien or mortgage holders on the property. If you are working with a homeowner with an FHA or a VA loan, then you will have to include additional forms with your short sale package. Examples of possible additional items include:
- The first mortgage holder may ask for a payoff amount from the 2nd
- The second mortgage holder may ask for a payoff amount from the 1st
- Initial Title Report
- Residential Real Estate Disclosure
- Addendum for Seller to Remain in Property
- Escrow Letter
- Insurance Cancellation Letter
- Affidavit of Trust
- Limited Power of Attorney
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