Short Sale - What is a Hardship?

A short sale occurs when a homeowner owes more on their property than the property is actually worth, but their lender agrees to accept a discounted pay-off in order to avoid the foreclosure process.  In other words, a home is sold to a buyer for less than what is owed on the mortgage by the seller.

In order for a lender to agree to this discounted pay-off, they have to be convinced that the homeowner really can't pay off the loan when the home is sold.  There has to be a hardship. So what would a lender consider to be a legitimate hardship?  Some examples are:

• Job loss
• Significant cut in pay
• Divorce
• Illness or death in the family
• Increase in property taxes
• Increase in payment due to an ARM resetting

Many homeowners with ARMs tied to the LIBOR are pleasantly surprised at their new low payments when their interest rates reset. The other items on the list are commonly-occurring real life events.  When applying for a short sale, the homeowner will have to prove their hardship, providing documentation just as they did in applying for their original loan - but this time to prove they can't pay rather than that they can.  They will also need to provide a hardship letter that explains what has changed in their life that is leading them to sell their home.

What if you are the buyer of a short sale property? Why does this matter to you?  If you are taking the time to write an offer, and then commit to waiting for a short sale to be approved (which can easily take 3-4 months or longer), you'll want to have some assurance that there really is a hardship situation that would cause the lender to approve the short sale.  You won't be privy to the documentation, but your agent needs to have a conversation with the listing agent so that you have a good idea that this is a legitimate situation.  Otherwise you'll be sitting around waiting for an approval that never comes while other desirable properties are being sold.

Bottom line is that whether you are a seller or a buyer of property, you need to have a trained, experienced real estate agent to guide you through the hurdles and pitfalls that you will encounter.  I've successfully closed short sales both as a lising agent and a buyer's representative.  In order to serve my clients even more effectively, I recently received my training and certification as a CDRS (Certified Default Resolution Specialist). 

Honestly, short sales aren't fun.  It's a question mark for both buyers and sellers whether or not it will close.  There is a lot of paperwork for the seller.  And the buyer has to wait . . . and wait . . . and wait.  If you don't have the patience, don't get in the game.

With that said, it's always deeply rewarding to help people reach their goals - whether it is getting a home sold, or helping someone buy their new nest.