How to Complete a Short Sale Process: A Homeowner's Step-by-Step Guide

A short sale approval from the bank can take up to 120 days. The four-month waiting period applies just to get the original approval.

Short sales are a great way to get an alternative to foreclosure when homeowners face financial difficulties. Your credit score takes a hit that's nowhere near as severe as a foreclosure. This makes short sales an appealing choice for homeowners who struggle with their mortgage payments.

The process might seem overwhelming at first. Our detailed guide will help you navigate through every step of your short sale. We'll show you how to prepare your hardship letter, gather financial documents, handle lender negotiations, and close the sale. This guide covers all the work to be done for completing your short sale successfully.

Would you like to see how a short sale fits your situation? Let's head over to the details.

What Is a Short Sale and How Does It Work

A short sale happens when a lender lets a homeowner sell their property for less than what they owe on the mortgage. This arrangement gives homeowners a way out when they're underwater on their mortgage—owing more than their home's worth.

Definition and simple mechanics

The short sale process starts when homeowners ask their lender's permission to sell below the mortgage amount. To name just one example, a homeowner might owe $200,000 on their mortgage but can only sell for $175,000. The $25,000 gap (plus closing costs) becomes the amount the lender might forgive [1].

Regular home sales differ from short sales because the lender must approve everything. The mortgage holder gets nothing from the sale. All money goes straight to the lender [2]. The lender can then either forgive the remaining balance or seek a deficiency judgment. This judgment would make the former homeowner pay all or part of the difference [2].

Banks usually take 90 to 120 days to approve short sales [3]. The process involves detailed documentation and talks between the homeowner, potential buyers, and the lender.

When a short sale makes sense for homeowners

Homeowners typically look at short sales in specific situations:

Financial hardship hits - job loss, divorce, medical emergency, bankruptcy, or death of the main income provider [3]
The home's equity isn't enough to cover the mortgage after closing costs [3]
The mortgage balance sits way above the current market value [4]

A short sale lets homeowners sell at the current appraised value and pay off their mortgage. They avoid foreclosure but must give up the property [4]. This option offers a better path than waiting for the lender to foreclose.

Short sale vs. foreclosure: Key differences

The significant differences between these options include:

Process Control

Short sale: Homeowners choose to sell with their lender's approval [1]
Foreclosure: Lenders take control after missed payments [2]

Timeline and Living Arrangements

Short sale: Homeowners stay put during the process [2]
Foreclosure: Lenders can evict homeowners after taking the property [2]

Credit Impact

Short sale: Does less damage to credit scores [5]
Foreclosure: Hits credit scores harder [2]

Future Homeownership

Short sale: New mortgage possible within 2 years (varies by lender and loan type) [6]
Foreclosure: Waiting period runs 2-7 years before buying again [2]

Both paths lead to losing your home. In spite of that, a short sale puts you in charge of the process. Lenders often prefer this too. They usually get more money than through foreclosure sales at auction, which tend to bring lower prices [3].

Sellers should work with real estate agents who know short sales well. These experts can help direct talks with lenders and build a strong case showing your financial hardship [4].

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Preparing for the Short Sale Process

Getting ready for a short sale takes solid groundwork to boost your chances of getting lender approval. You'll need to get your finances in order, collect important paperwork, and team up with qualified professionals before you start negotiations.

Assessing your financial situation

Your short sale request must show real financial hardship. Lenders say yes to short sales at the time two main things happen: you face financial hardship and there's not enough equity to cover the mortgage after closing costs.

Your hardship should come from situations you couldn't control. Here are some qualifying hardships:

Job loss or major income cuts
Divorce or separation
Medical crisis or serious illness
Bankruptcy filing
Loss of main income provider

On top of that, your loan needs to be in default for at least 60-90 days in most cases. Some lenders might look at pre-default cases one by one [7]. Take a hard look at your monthly budget—a short sale could be right if you can't pay your mortgage and see no way to bounce back.

Gathering essential documents

A detailed short sale package is vital. Each lender has its own rules, but most want these documents:

Your signed letter letting your agent talk to the lender
A clear hardship letter that explains your money troubles
Last two years of tax returns with W-2 forms
Latest 30 days of pay stubs (or proof of current income)
Last two months of bank statements
Your current budget with income and expenses
Proof of your hardship (medical bills, divorce papers, etc.)
Mortgage statements for every loan on the property
A full financial statement or Request for Mortgage Assistance (RMA)

Your hardship letter needs extra care since it shows the lender why a short sale makes business sense. Show that your situation is real, out of your hands, and won't get better soon [8].

Finding a real estate agent experienced in short sales

The right agent with short sale experience can make all the difference. Here's what to look for in potential agents:

Check their short sale success rate first. They should tell you about their current short sale listings and closed deals from the past year [9]. Good agents will show proof of successful deals and know the latest rules.

Look for special training or certifications like the National Association of Realtors (NAR) Short Sales and Foreclosures Resource Certification (SFR) or Certified Distressed Property Expert (CDPE) designation [9].

Ask if they've worked with your lender before - these connections can make negotiations smoother. Find out if they have a team with a short sale expert or lawyer for tough cases [9].

Note that your asking price must work for both buyers and your lender. A seasoned agent will help price it right—usually just under market value to spark interest during the long approval process [10].

Submitting Your Short Sale Package to the Lender

You need to put together your short sale package for your lender after collecting all documents. This is a vital step that needs careful attention. Packages with missing details or poor presentation often get delayed or rejected.

Creating a compelling hardship letter

Your hardship letter is the life-blood of your short sale request. This document tells why you can't make mortgage payments due to situations you couldn't control. A good hardship letter should:

Show the date you bought your home and when money problems started
Give a short explanation of your specific problem (job loss, medical emergency, divorce, etc.)
Stick to facts about your case in one page or less
Close by stating a short sale is your only option besides foreclosure

Your financial problems must be genuine. Lenders accept hardships like job loss, spouse's death, medical emergencies, bankruptcy, military service, or natural disasters. Note that you shouldn't mention anything that could weaken your case, such as future income or hidden assets.

Financial documentation requirements

Lenders want complete documentation to check your financial hardship. A full short sale package needs:

A form that lets your agent talk to the lender
Tax returns from the past two years with all pages, signed and dated
Latest pay stubs or proof of what you earn now
Last two months' bank statements (all pages)
Monthly budget showing what comes in and goes out
Filled-out financial statement or personal money worksheet
Papers that back up your hardship (medical bills, job termination notice, divorce papers)

Your lender might use this financial information if they deny the short sale and go for foreclosure. So, you should think over talking to a lawyer before sending anything. If you have cash saved up, lenders might want you to use it for mortgage payments or cover gaps.

Property valuation and listing agreement

Lenders will assess your property's market value before they say yes to a short sale. To help get an accurate value:

Add a Comparative Market Analysis (CMA) from your real estate agent
Get info about recent sales of similar homes nearby
Document any condition issues that affect your home's value
Add repair estimates from contractors if needed

The package must have your listing agreement too. This shows when you put the property up for sale, who's selling it, commission details, and how long it's listed for. After listing, your lender might want a Broker Price Opinion (BPO) or appraisal to find the fair market value.

Market data must support your sales price. Many short sales fail because property values come in higher than offers. Work with your agent to prepare solid documentation that backs up your asking price.

Note that submitting your package is just step one. The original review usually takes 30-45 days. Your lender might ask for more documents or want you to explain things you've already sent.

Navigating the Short Sale Timeline

Patience becomes your biggest asset after submitting your short sale package to the lender. Most short sales take 4-5 months from listing to closing, though each case is different [11]. This timeline helps you set realistic expectations about what's ahead.

Original lender review (30-45 days)

The lender needs 30-45 days to complete their original review after receiving your complete short sale package [12]. Several factors can extend this timeline:

Single mortgage: about two months for review [12]
First and second mortgage with same lender: about three months [12]
Two or more mortgages with different lenders: four months or longer [12]

The lender assigns a negotiator to your file and orders a property valuation through a Broker Price Opinion (BPO) or formal appraisal during this review period [13]. This valuation helps the bank determine fair market value.

Your real estate agent should contact the lender once or twice weekly to track progress and keep the bank accountable [3]. Regular follow-ups help your file stay active and prevent delays.

Marketing the property while waiting

Active marketing must continue throughout the lender's review period. The property needs competitive pricing to attract qualified buyers. Most agents suggest price reductions every 2-3 weeks based on property activity [11].

Most agents price short sale properties close to fair market value [14]. This strategy attracts buyers while meeting the lender's valuation expectations. Note that banks prefer "as-is" offers without repair credits or seller-paid closing costs [15].

Receiving and negotiating offers

You must accept offers before submitting them to the lender for approval. The lender compares each offer against their property valuation to seek the highest possible return. They usually take several weeks to months to review offers [16].

What makes an ideal short sale offer?

Prequalified or preapproved buyer
Minimal contingencies (especially no home sale contingency)
Flexible closing timeline (typically 30 days after lender approval)
Patient buyer willing to wait for the process [15]

Your agent might suggest submitting even lower offers to the lender since this could temporarily stop foreclosure proceedings [15]. The bank can counter or reject it, but an active offer under review often buys valuable time.

Note that your acceptance of an offer doesn't guarantee bank approval. The lender might reject reasonable offers if they believe foreclosure could recover more money [16].

Closing Your Short Sale Successfully

The final stage of the short sale process starts when you get the long-awaited approval letter from your lender. This vital document shows you've successfully directed your way through the toughest hurdles. Several important steps still remain before you can close the transaction officially.

Getting final lender approval

The short sale approval letter confirms the seller's qualification, approved sales price, and buyer's funding clearance [17]. Banks issue this document only after they accept a buyer's offer. The bank can reject a short sale if foreclosure seems better, if the property has too many liens, if the owner files for bankruptcy, or if the owner doesn't meet the bank's terms [17].

Quick action is essential after approval. Most approval letters come with an expiration date—usually 30 days—to close the sale [3]. Any delays might need extensions, and banks don't guarantee these.

Understanding closing costs and responsibilities

Short sales are nowhere near traditional transactions when it comes to closing costs. Sellers typically don't have out-of-pocket expenses [18]. The lender knows about the standard property selling costs, including realtor commissions, conveyance taxes, legal fees, and other closing expenses [18].

The lender deducts these costs from the sale proceeds before getting their share. Buyers should expect to pay their full closing costs since lenders rarely offer concessions [2]. Sometimes banks might help with closing costs if the buyer's offer makes sense, especially to avoid foreclosure [2].

Completing the sale and transferring ownership

The title company and escrow agent handle all final paperwork once everyone agrees [19]. The lender releases the property's lien during closing, and the proceeds pay off your mortgage [19]. You need to leave the property by the agreed date.

Make sure you get a deficiency waiver in writing if the lender agrees to forgive the remaining balance [16]. You might still owe the difference between sale proceeds and loan balance without this document.

It's worth mentioning that a short sale will impact your credit score [16]. Your credit report usually shows the missed mortgage payments before the short sale as delinquencies. Try to convince the bank not to report these defaults if possible [16].

Conclusion

Short sales are a viable way out for homeowners facing financial hardship, but the process needs patience and careful preparation. The 4-5 month timeline might seem daunting, yet successful completion brings many advantages compared to foreclosure, especially when considering future homeownership opportunities.

My experience in guiding homeowners through this process shows how proper documentation and professional guidance make all the difference. A well-prepared short sale package and an experienced real estate agent's support will boost your chances of lender approval.

A short sale will affect your credit score, but the effect is nowhere near as severe as foreclosure. Most homeowners can qualify for new mortgages within two years, instead of waiting up to seven years after foreclosure. This knowledge and understanding of the process will help you decide if a short sale fits your specific situation.

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