A short sale occurs when a borrower owes more on a home than the home is worth and the lender agrees to accept less than what is owed in a sale. Short selling is a foreclosure alternative. It allows the borrower to get out of the mortgage without having to fully repay it and without having to go through a foreclosure.
Lenders do not like short sales because each one represents a loss. Lenders also do not like foreclosures because they are expensive to undertake. They would prefer that borrowers wait out a housing recession and allow appreciation to catch up with the loan values. Consequently, lenders do not just let buyers out of their loans through short sales, even if it means a foreclosure could result. Lenders make all prospective short sellers prove that they cannot continue to make the mortgage payments because of a hardship. Acceptable hardships include job loss, reduction in wages, health problems and divorce. The borrower attaches an explanation of the hardship along with financial records such as W2s, tax returns and bank statements with either a short sale application or the buyer’s offer on the house. The lender can then approve or disapprove the short sale. If the information comes with an offer, the lender can accept, reject or counter it.
Comparative Market Analysis
If they permit a short sale, lenders want to make sure that they are at least getting the most on the home that the market will bring. They want to avoid situations in which a buyer purchases the house below market value, exacerbating their loss. Lenders therefore require the borrower to submit a comparative market analysis to demonstrate that the listing price is at or near market value. Both the seller and the lender must approve a real estate offer when it is made. If the lender does not believe the offer represents market value, it will counter the offer at a higher price.
The Home Affordable Foreclosure Alternatives program, begun in 2010, streamlines the short sale process and provides financial incentives to both sellers and lenders to participate. One of the problems with short sales has been that they can drag on for months, often resulting in the buyer walking away from the deal. HAFA keeps short sales to standard closing timelines, requires lenders to provide sellers with preapproved sales terms upfront and also releases the seller from future liability for the mortgage debt. If a lender participates in HAMP, the Home Affordable Modification Program, it is obligated to participate in HAFA. Not all lenders participate in HAMP or HAFA.