How Do Short Sales Work for Sellers?

Hello Hampton Roads,

How do Short Sales Work for Sellers?
First let's define what a short sale is before going into the details of how short sales work!  A short sale occurs when the property is sold for less than the mortgage amount (it is sold short the mortgage) with the approval of the lender. A short sale must have lender approval because even though the buyer and seller may agree, if the lender doesn’t approve the sale, it won’t happen. The short sale process can be long and arduous but the with advent of the HAFA (Home Affordable Foreclosure Alternatives) program, recently in effect since April 5, 2010, the time lines for eligible short sales are greatly reduced! A short sale is a foreclosure alternative with benefits for the homeowner, the lender, and the community as a whole.


The homeowner avoids the stigma of foreclosure and as well as the negative impact to his or her credit. The lender will recover more than if the property goes into foreclosure—for some lenders the recovery loss from a short sale may be 60% while the recover loss from a foreclosure is just 30%. The community benefits as well because homes being sold as short sales tend to be better kept than foreclosure properties since in many cases, the homeowners are still living in the house and the properties are not a scourge on the neighborhood. Additionally, the US Treasury estimates that each foreclosure decreases the value of surrounding properties by 9%, therefore every foreclosure avoided helps stabilize communities towards a faster recovery.

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Sidebar: In addition, is important to understand the pros and cons of Foreclosures vs Short Sales .
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Now let’s look at the short sale process.
In order for a bank to consider a short sale, these considerations must be met:
  • The seller must have a verifiable, bona fide hardship
  • The seller owes more on the home than it is currently worth
  • The seller is either behind on payments or will be behind on payments in the near future.
(Note this is usually for primary residences only—many banks will not allow a short sale on an investment property)

The next step is to request the short sale package from the bank which essentially documents the seller’s financial situation. Each bank has their own guidelines and lists of required paperwork, but examples of standard requested documentation are as follows:

  • Letter of authorization, which lets your agent speak to the bank.
  • Pre-liminary HUD -1 Settlement Statement or Net Sheet
  • Seller’s financial statement
  • Seller's hardship letter
  • 2 years of tax returns
  • 2 years of W-2s
  • Recent payroll stubs
  • Last 2 months of bank statements
  • Comparative market analysis or list of recent comparable sales

Once the seller has obtained an offer to purchase from a qualified buyer then the following events take place:

  • The buyer’s offer is submitted to the bank along with other documentation such as a copy of the listing agreement, required addendums, buyer’s pre-approval letter(s), copy of earnest money check and the seller’s short sale package. If the package is incomplete, the bank will not look at it.
  • If there is more than 1 lien holder involved the package must be sent to each one who will be effected by the short sale.
  • Follow up with bank to confirm receipt of file. This can take a week or more.
  • File is assigned a Negotiator. This can take 30-60 days
  • BPO is ordered—this can take up to another 30 days
  • File is reviewed –this can take up to 2 wks to another 30 days
  • The bank issues short sale approval or rejection.

If you or someone you know owes more on a home that it is now worth, feel free to contact me if you have any questions or need any help!


Thanks for Reading,


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Serving your Hampton Roads and Virginia Beach Real Estate needs.

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