Each financial institution is going to have its own protocol for processing a short sale. In the past, most banks would require you to submit your complete short sale package by fax or snail mail. Today, it’s more likely that you or your real estate agent, will be required to upload your documents through a 3rd party processing site like Equator.com.
The good news is that the core financial documents required to initiate a short sale, are going to be the same. Here is what you are going to need:
Prove Your Financial Hardship.
Hardship Letter: The key to writing an effective hardship letter is not to exaggerate your financial woes, but rather to be detailed and provide specific, verifiable evidence about the problems affecting you. For instance, let’s say you are a construction worker who fell and injured himself on a job site. You might explain that you fell on your back, ruptured three discs and that you have a letter from a physician stating that the injury has rendered you permanently disabled and unable to work. Resigned to disability pay for the past year, you paid your mortgage for as long as you could, but have been unable to pay your mortgage for the past six months.
The 2-2-2 Rule
Pay Stubs: Most banks will require that you provide them with your two most recent pay stubs, at minimum. However, depending on the lender and your source of income, (particularly if your are self-employed) the past two months worth of pay stubs or more may be required. Keep in mind that the short sales process can last anywhere from a couple of months to over a year. It’s a good idea to save your new pay stubs and keep them handy, just in case the bank asks you to update your file with your latest pay stubs.
Bank Statements: Typically you will be asked to submit your two most recent monthly bank statements. Again, save your new bank statements as they come in, so that you can easily update your paperwork as needed.
W-2 Tax Returns: The past two years of tax returns, should suffice. If a new year passes before your short sale is approved and closes, you may be required to update your file with your most recent return.
Settlement Statement: Also referred to as a HUD-1, the settlement statement gives an item by item breakdown of the costs involved in your real estate transaction, as well as the dollar amount that the bank will net from the sale after commissions, escrow fees, and all of the other transaction costs and fees involved in the sale are accounted for.
Broker Authorization Letter: If you hire a real estate agent to work on your short sale transaction with the bank, the bank will require you to provide an authorization letter, that allows your real estate agent to communicate with the bank on your behalf. The letter allows your agent to:
1) Submit an offer from a buyer to the bank.
2) To speak to the bank’s short sale negotiator assigned to your file to get updates and confirm that all the documents required for your short sale packet are in place.
Listing Agreement: You must submit a fully signed & executed listing agreement to the bank. Be sure that all signatures, initials and dates are in place, or there could be delays. When you set a listing price, while it is a common strategy to set a price below market value to attract buyers, resist pricing the home too far below market value. Keep in mind that when the bank approves a short sale price, they are going to base it on the assessment of a 3rd party appraiser, who will let them know what recent sales prices have been in the neighborhood. Having said that, the typical short sale will usually sell below market value. But to be realistic, expect something more along the lines of a 15-20% markdown rather than 50-60% below market value.
Purchase Contract: You only submit one offer to the bank. Even if multiple offers are received, it is up to you and your real estate agent to determine which one to submit it to the bank. While the offer of the price is important, you should also consider the type of financing and the willingness of the buyer to wait for several months to a year for short sale approval.
On a Final Note…
In a nutshell, these are the basic documents that you are going to need to initiate a short sale. However the laws surrounding short sales are constantly evolving, so it’s advisable to follow new trends and regulations pertaining to the process. To that end, the California Association of Realtors (C.A.R.) short sale website, is a great resource for Realtors and homeowners alike.