Short sale rules of the road

November 21, 9:55 AMMortgage and Housing ExaminerShelby Bateson

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With the passage, of the home buyer tax credit, many home owners, especially those who are underwater on their mortgage, are asking if they can short s their current home and qualify for the home owner tax credit if they purchase another house.  Technically, the answer is that a short sale on your current home will not disqualify you for the tax credit, but the problem becomes qualifying for another mortgage.

Getting a short sale approved is not a walk in the park.  In fact, it is very similar to getting a loan modification approved, so you might as well get your papers together and try that route first.  With most banks, you will need to submit almost all the same paperwork anyway to get that short sale approval.

Most banks will require all of the following paperwork:

1. Hardship letter
2. 2 years W-2s or tax returns
3. 2 months pay stubs
4. 2 months bank statements
5. most recent 401K or retirement account statement
6. Financial statement showing all your current assets and liabilities (this is actually more of a monthly budget form.  Unlike a loan application, you will need to show your monthly utility bills, allowances for food, clothing, gas for your car, auto insurance, cell phone bill, child care costs, etc.)

The above are papers you will need to try to negotiate for a loan modification.  In addition, for a short sale, you will need:

1. copy of your home listing agreement with a realtor
2. copy of an offer from a potential buyer
3. a signed written authorization to allow your realtor, CPA, or attorney to speak to the lender on your behalf. 

Lenders are very reluctant to allow short sales if making your current loan payments is not a hardship for you, so your hardship letter has to be almost more like a plea for mercy to your lender.  If your income has dropped this year, you must show evidence of that, AND write about the details in your letter. Be sure to include dates that events occurred. and relevant explanations  (examples, your work hours were cut from 40 hours per week to 30 hours per week effective 6/12/2009, or you were injured on 7/19/2009).

The larger banks will almost never allow you to sell your home without the assistance of a realtor, which really does not make sense, since this would reduce their loss.  But the logic that seems to prevail is that the increased exposure with a real estate broker will get you a better price, so go ahead and get that house listed before you even attempt to negotiate with your lender.

Banks will not approve a short sale until you have an offer in hand, so save yourself the time and frustration of trying to get that short sale approved in advance.  Again, the logic here is that a bank won't approve a short sale amount, if you might potentially get a better offer.

Realtors almost unanimously report that few banks will permit a short sale until you are already late on your mortgage payments, and this is the reason why qualifying for a loan to get that tax credit does not work.  Almost all, if not all, lending programs require that you show NO late mortgage or rent payments in the last 12 months. 

Here are a few tips that you might not hear elsewhere:

Do not send your lender an IRA or 401K statement showing a substantial balance in retirement savings.  While banks technically cannot require you to liquidate your retirement savings, the reality is that any form of available cash makes banks less likely to approve your modification or short sale request. 

Make sure the real estate agent you choose has a lot of experience in doing short sales.  This is really important to get that short sale offer approved, AND it is important to protect you.  A real estate agent who has been doing short sales for years will have bank contacts to hopefully expedite the process.  Also, this person will likely have more negotiating strength with your lender regarding getting an agreement from your lender protecting you in the following details:

1. how the bank reports the sale to the credit bureaus - you want the lender to report the sale as paid off - NOT paid/settled
2. you want a written agreement from your lender (s) that they will NOT pursue a deficiency judgment against you either immediately or at any time in the future.

While many states are non-recourse states and you think you might be protected from deficiency judgments, technically the legislation that has been passed to protect you from deficiency judgments pertains to foreclosures, not short sales.

For more details about the laws that apply, please read:

Banks threaten future lawsuits against short sellers
Is a short sale the end of your problems, or just the beginning?