If you\’re confused as to how does a short sale work, you\’re not alone. Much confusion surrounds this issue because the process varies by lender and state. Prior to Obama\’s Making Home Affordable program there was no specific protocol and banks were floundering about as they developed policies.

To accurately answer the question of how does a short sale work would require a book. The only way to determine exact policies is by contacting the servicing lender. However, most banks follow similar protocol to Making Home Affordable.

It can be helpful to visit the Making Home Affordable website to determine if your lender participates in the program. Participating lenders are required to respond to MHA short sale requests in a more expedient fashion.

The Short Sale Act of 2011 is up for legislative review and if passed would require banks to respond within 45 days of homeowners\’ written request. For now, homeowners will have to patiently wait out the approval process.

Under Making Home Affordable Foreclosure Alternatives Program (HAFA), homeowners must have their property listed through a realtor for a minimum of 120-days before allowed to apply for short sales.

The term \’short sale\’ stems from the fact that banks allow homeowners to sell their home \’short\’ of the balance owed on the loan. Some lenders write-off remaining balances while others hold borrowers responsible for restitution.

It\’s important to determine which method is used by your lender. If held responsible for deficiency amounts, you might qualify for deed in lieu of foreclosure instead. Deed in lieu involves returning the property to the bank.

It can be advantageous to hire a real estate attorney to negotiate a \’Payment in Full without Pursuit of Deficiency Judgment\’ for either short sales or deed in lieu transactions. This document releases borrowers from owing deficiency amounts.

The short sale process involves audit of borrowers\’ financial affairs. Lenders require wage earning statements, tax returns, bank records, and list of income and expenses. If banks require a buyer to be in place before granting short sale approval, borrowers will need to provide HUD-1 Settlement Statement, buyer\’s pre-approved financing documents, and lien releases.

Most lenders require homeowners to present a letter of hardship which outlines events leading to financial hardship or mortgage default. As a real estate investor who specializes in distressed properties, I can tell you hardship letters are an important element in obtaining approval.

Lenders tend to be more receptive to borrowers who have taken steps to resolve financial issues. It\’s important to let lenders know if you\’ve taken a second job, sold a car to reduce transportation costs, eliminated cable or cell phone, or engage in grocery coupon clipping. It isn\’t necessary to provide every detail, but do include actions that have reduced living expenses.

On average, the short sale process extends for 4 to 6 months. This can sometimes result in buyers backing out of the deal because they are tired of waiting to take possession. Short sales are reported to credit bureaus and will negatively impact FICO scores. It is advantageous for homeowners to engage in credit repairs soon after the sale.

Author Bio: Simon Volkov is a California investor and author of \”Short Sale Hardship Letter eBook Course.\” He provides additional details about how does a short sale work and offers foreclosure prevention information and resources at www.SimonVolkov.com.

Category: Real Estate
Keywords: how does a short sale work, real estate short sales, short sale process, short sale approval