In a typical short sale, the lender agrees to accept net proceeds from the closing, perhaps with some additional consideration from the seller (such as cash or a promissory note) in exchange for releasing its lien. Lenders do not agree to short sales to be generous. In negotiating the short sale the lender needs to be convinced that it will come out better than it would by foreclosing on the property and pursuing the seller for its losses. Though short sale procedures vary somewhat from lender to lender, most lenders need to be convinced of the following:
- Proposed sales price is equal to or higher than the lender would receive for the property after a foreclosure.
- Commission under the proposed transaction is equal to or less than te commission the lender would pay if selling the property after foreclosure
- Explanation of the seller’s circumstances which created the need for te short sale transaction (eg divorce, medical problems, death, birth of a child taking one wage earner out of the work force, loss of a job or job transfer).
- Proof that the seller lacks funds to make up the shortfall (copies of financial statements, tax returns for the previous two years and paycheck stubs for the most recent pay periods.
A borrower with minimal assets, little income and a willingness to file bankruptcy has little to lose by providing financial information. However, most candidates for short sales have some assets, a good job with wages that can be garnished or a desire to avoid bankruptcy. Candidates for short sales need legal advice regarding the prudence of submitting financial information to the lender. Refusal to submit financial information to a lender greatly decreases the chances of closing, but does not necessarily rule it out.
While a foreclosure remains on a person’s credit report for seven years, a short sale may not reflect poorly on one’s credit report. Sellers should ask and possibly negotiate how the lender would report the loan payoff to credit reporting agencies. In many cases, the lending institution will report the loan as “paid in full.” It could also show on the credit report as “settled” or “paid” or “short payoff”. It depends on the the lender and the seller’s ability to negotiate.