If current trends continue, it looks like short sales will creep above foreclosures in most markets (especially the West Coast). Whether you’re considering a short sale with your own property or contemplating purchasing a home from the bank in a short sale, we figured we’d recap the most important elements to the, sometimes grueling, process.
A short sale means that the owner sells his/her home for less than the mortgage total owed to the bank. The bank will agree to this type of sale in order to prevent a foreclosure. While short sales happened in years past, they have increased due to the overall economy, struggling housing market, and number of foreclosures.
The homeowners who owe more on their homes than they are worth must be qualified by the bank in order to conduct a short sale. The owner needs to verify some type of financial hardship, such as a job change, medical bills, divorce, or other situations on a case-by-case basis. The government can offer some incentives to homeowners to list their homes as a short sale.
While most homes typically close in 30 to 60 days, short sales take a longer time to close. According to information from RealtyTrac.com, homes that went through the short sale process took almost 11 months to close during the second quarter of 2012. The previous year, that time frame was about three months shorter, still a time-consuming process when compared with purchasing a home through traditional means. In addition, the bank can take six months or longer to even look at the short sale. When added together, the process can take up to 18 months, a long time for buyers to be in limbo with no end in sight.
Reasons for Delays
- The original homeowner may have a second or even a third mortgage on their home. When the primary lender loses money, they have nothing to give to the second lien-holder. The second bank might refuse to work with the first bank on the short sale since they know they won’t recover their investment.
- In reviewing a homeowner’s credit report, the bank will look at the payment history for other bills and may have the homeowner promise to repay some of the difference. The homeowner can refuse to sign the note.
- Homeowners buy private mortgage insurance (PMI) to bridge the gap between what they put down on the home, such as 5 to 10 percent, up to 20 percent. The companies who back PMI lose their money when a home goes into short sale. By delaying the short sale and pushing for a foreclosure, the company can continue to collect PMI. When a second bank is added to the mix, with additional considerations for PMI, the situation becomes even more complicated. By waiting, the company can receive more PMI in the future.
Short Sale Process
The short sale usually goes through a step-by-step process. First, the realtor/seller submits the offer to the bank, who must then respond to the offer, which can take from 10 to 30 days. The bank will schedule a home appraisal, which takes one or two months. A review of the file takes one to two months, and then a negotiator is assigned to the file, which also takes one to two months. Next, a second negotiator might be assigned, which takes an additional one to three months. Finally, the file is approved or rejected, which takes from one to four months.
At any step of the process, the short sale can run into problems. Patience often overcomes many obstacles if you are seeking short-sale approval.