What To Consider When Qualifying A Short Sale

Short sales are slowly fading into the past but good deals will remain until increasing house values fully exceed under water values. Right now, short sales remain a viable investment option in many markets.

Start By Qualifying the Seller

While the amount of time it takes loan servicers to decide to accept a short sale has shortened considerably, it can still be frustrating to go through the process only to have the servicer determine the seller doesn’t qualify. I’m not talking about rejecting the offer or making a higher counter offer. Both of those keep you in the game as the buyer. You can decide whether to make a counter offer. But when the seller doesn’t qualify, the game is over. You’ve wasted your time and had your money sitting idle on the sidelines with no hope of completing the deal.

For that reason, it’s prudent for you to prequalify the seller before entering negotiations with the loan servicer. Not all sellers are going to be willing to share their financial information with you. You need to walk away from those that won’t. There are too many opportunities in today’s market for you to waste time with an uncooperative seller.

While realtors and loan servicers have figured out the short sale process, for sellers, it’s a one time process. Many lack experience with the short sale rules. While many sellers think a short sale is the answer to their mortgage nightmare, what they don’t understand is they don’t qualify for a short sale.

© Andy Dean - Fotolia.com

© Andy Dean – Fotolia.com

The Rules for Qualifying the Seller

Unfortunately, the rules are complex and there is still not an industry standard. The closest there is to a standard is the Home Affordable Foreclosure Alternative (HAFA) process. Here are the highlights of the process:

  • The mortgage must have been written prior to January 1, 2009.
  • The seller must have attempted to qualify for a loan modification under the Home Affordable Modification Program (HAMP). This means either applying for but not qualifying for the program or initially qualifying but failing to stay current with mortgage payments.
  • Financial and hardship information obtained during the loan modification process can be rolled forward to the short sale process.
  • The HAFA process allows but does not require loan servicers to pre-approve short sale terms before listing the property.
  • The process does require the property to be listed with a real estate professional.
  • The property must be the primary residence or have been vacant or rented out for less than 12 months. Long-term rentals and vacation properties don’t qualify.
  • There must be a genuine financial hardship experienced by the seller.

What Trips Up Many Short Sale Sellers

The financial hardship trips up many sellers. They may be experiencing a cash flow problem because of a job loss or reduction in pay or even out of work because of an illness. However, if they have other assets that could be sold to make up the difference in the short sale, they won’t qualify. This includes savings accounts, owning stocks and bonds, owning other real estate, and can include 401K and IRA retirement accounts.

The good news is that if you are working with a seller that does qualify (and plenty do) the loan servicer is required to respond to an offer within 10 business days.

The bottom line is you need to be sure the seller is going to or already has qualified for a short sale before investing too much of your time. Those already pre-approved for a short sale make a good target. I would not worry about being locked into any minimum allowable proceeds, the market place is constantly changing and so is the value of the house. Sellers you want to be wary of are those that haven’t attempted a loan modification and those having assets to apply towards repaying the loan in full.

On October 24, 2011, President Obama announced a change in the Home Affordable Refinance Program to allow owners with a mortgage owed as high as 125% of market value to qualify for a loan modification. This will appeal to owners that want to stay in their home but are having trouble affording it. However, short sales will continue to be the path of least resistance for those wanting out of the house. Stay tuned for ongoing real estate market changes.


Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.