What is a short sale?

October 11, 2011 – You may have heard the term short sale as it relates to the real estate or mortgage industry. A short sale occurs if the homeowner can no longer make mortgage payments on the property, and the home is sold for proceeds that fall short of the balance owed to the lender.

The lender and the homeowner must agree to the terms of a short sale before it is approved, and it is usually occurs as a way to avoid a foreclosure or a bankruptcy.

As part of the approval process, lenders typically ask the homeowner to write a hardship letter describing why they got into a financial bind before they approve a short sale. Writing a good hardship letter can be the most important part of the process.

While it’s true that the sadder the letter is, the better it may appear to the lender, they will not be empathetic to dishonesty or illegal behavior. Lenders will, however, understand if you lost your job or had unexpected medical costs that prevented you from paying your mortgage. Other examples of a hardship may include a divorce, job transfer or military service.

When writing the letter, explain how you got into the hardship situation. Also include the steps you have taken to try to get out of the situation, and why the situation is permanent, if there is nothing you can do to change it.

Use numbers to explain the loss of income. For example, if your credit cards are maxed out due to negative cash flow or loss of income, be specific and say, “I’ve borrowed $15,000 against my MasterCard to pay my mortgage and other bills over the past few months, and I’ve exhausted my credit.”

Gather documentation to back up the facts in the letter such as bank statements, late notices, tax returns,  pay stubs, unemployment benefit letters, or anything else that can show proof of your hardship.

Keep in mind that a lender who accepts a short sale may legally pursue the homeowner for the difference between the amount owed and the amount paid. Ask your lender if they plan to do this before selling the property.

Finally, ask the lender if they plan report the adverse credit transaction to the credit bureaus. They are under no obligation to comply with a request not to report the transaction since credit report status is not always negotiable, but it is good to know upfront.

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