Short Sales 101

Short Sale: selling a home for less than is owed to the mortgage lender. In the current housing market and economic strife that the country is facing right now, homeowners are finding it harder and harder to make ends meet. Whether the reason is job loss, disability, death, mortgage rates, increased cost of living, there is still a way out without having a foreclosure on your credit report. Over the last 48 months, lenders have been taking a beating with foreclosure rates. Sadly, foreclosure rates are the highest they have been in years; 1 out of every 54 homes having a foreclosure filing within the last year. New Jersey is ranked the 10^th highest state with foreclosure rates in the country with almost 70,000 homes that have had foreclosure filings in 2008.*  
What this means to banks is losses.  Severe losses due to costly attorney fees for the foreclosure, eviction, and sale; Realtor fees at 6% and sometimes higher; costs to clean the property out;  then cost to maintain the property until it sells lawn, snow, electricity, heat (if not winterized) etc. All these little things add up to large sums of money and extremely large losses to the lender. 
Doing what is called a Short Sale is a win-win situation for both the distressed home owner as well as the lender, enabling both parties to ease the pain and burden of a foreclosure while minimizing the embarrassment and after effects of a foreclosure. In a short sale, the bank agrees to take less than is owed on the mortgage, the balance is forgiven and the borrower is spared from a foreclosure on their credit report. The only real negative effects on the borrowers credit report is that the mortgage will be marked as settled which will have a small effect as compared to the long lasting effects of a foreclosure.
The first key to a successful short sale is choosing the right real estate professional to assist you in the process and get your home listed for market value. Pricing is paramount at this point because if the house is listed for too much buyers will not be interested enough to come see your home and make offers. The next step is to contact the mortgage servicer and provide them with the documentation they require for approval to speak with your Realtor and real estate attorney. Once the bank receives that information the agent can then contact the bank and find out exactly what they are going to require in order to begin reviewing a short sale.
Each bank has slightly different requirements as to what they need to review in order to process and approve a short sale however they all require the following basic information. The first thing they will require is a hardship letter explaining why the homeowner is in the current situation. Next they will be looking for a financial worksheet some lenders require this on a specific form detailing exactly where income comes from and exactly where it goes all the way down to entertainment. They will also likely want to see either pay stubs, W-2s, tax returns for the last 1-2 years or something of this nature to verify the income levels that you have stated.  If the owner is self-employed or works on 1099 then make sure to ask what they would like instead sometimes they will be satisfied with a current profit and loss statement. They will also need a copy of the listing agreement and possibly a copy of the MLS listing. Once all of the requested documents have been put together they must be faxed in to the mortgage holder. Once an offer is received and accepted the bank will require a copy of the sales contract, estimated HUD-1 (statement showing all closing charges and monies exchanged), and buyers pre-approval letter or proof of funds for a cash deal. The mortgage company will also want to see a copy of the MLS listing as well as a copy of the listing agreement between the seller and Realtor. IMPORTANT each page must include the following: borrowers name, loan number, signature, date.  If any of the above is missing it will delay the process.
Once all the required information has been submitted the Realtor® should call in 2-3 days to ensure they have received all the documents and they are not missing anything that they require. If they have all the information the next step will be for the bank to assign a negotiator to the file to begin reviewing everything. The Realtor should call every 2-3 days to check the status of the short sale and make sure there is nothing else required by the bank. Once the bank gives approvals on the short sale they will normally require the purchaser to close the deal within 30 days otherwise they may require all the paperwork to be submitted again.
It seems like a lot, but a Realtor that has done a few knows and understands the process and will foresee the pitfalls that may come up and assist in navigating through them successfully. This information is not meant to replace the advice of an attorney or tax advisor. Laws may be different from state to state, please consult a professional in your area for a referral, contact me at jaspelund@remax.net or via cell at 732-207-1908.  Please visit my website at www.gardenstatemoves.com for other information as well.
* Statistical data from an article written for REALTYTRAC® written on Jan. 15, 2009 by Michelle Sabolich