Short sales have been around for decades but have been almost a household word in real estate circles for the past four or five years and is one of the terms that can confuse homebuyers. Buyers and use VA home loans to purchase a short sale but there is a process that must be followed for a successful short sale. What is a short sale?
Specifically, a short sale occurs when a lender agrees to settle for less than what is owed on a property as “paid in full.” As property values rose during the mid-part of the last decade, home sales soared. Not only were prices increasing it was easy to get approved for a mortgage. Lenders introduced mortgage programs that allowed those to buy and finance a home with poor credit, very little down and without having to document any income or employment whatsoever. For a short while, this worked but ultimately the merry-go-round stopped and everyone came to a cold reality. Banks were shut down, homes were foreclosed upon at breakneck speed and prices fell to below basement levels.
Some homeowners were fortunate and had equity in their homes, allowing them to sell. Yet many more found they owed more on the home than what the property was worth and couldn’t sell. Well, they could sell if the owners came to the closing table with thousands of dollars.
Short Sale Math
Say that property owner bought a home for $300,000 and put 10 percent down and financed $270,000. Yet over a brief period, the values fell way below the initial purchase price. In this example, the value fell from $300,000 to $200,000 and had an outstanding loan balance of approximately $265,000. The owner was facing foreclosure but couldn’t sell the home for enough to pay off the $265,000 balance without bringing at least $65,000 to the table. Banks, buyers and property owners were stuck.
Yet what if the bank decided to accept less than what was owed? Would a bank do that? Yes a bank would do that. The bank could accept the market value in this example of $200,000 and avoid foreclosing on a property. Foreclosures are expensive for lenders and as each month passes the lender loses more and more money in addition to the legal fees and expenses incurred during the foreclosure.
A short sale is a way for a lender to cut its losses and get the non-performing asset, the home, off of its books.
VA Loans and Short Sale Offers
Yet don’t expect a lender to accept a short sale offer simply because a request was made. The lender needs to be convinced that a short sale is the preferable alternative and the lender has some minimum requirements that must first be met before a short sale request can be approved.
The first being the owner must be behind on the payments. Someone that is “upside down” but still making the mortgage payments on time isn’t a good candidate for a short sale—the owner is making the mortgage payments as agreed.
Next, if there are missed payments, the owner must document the reason for the late payments. This can be done by documenting a layoff or a letter from a previous employer or a business that had to close. The lender will also review tax returns from the previous year and bank and investment statements. If the owner has enough funds in an account to pay the difference between the mortgage amount and sales price, the short sale request will have a tough time being approved.
Your role means providing a sales contract as well as documentation showing that the sales price is in line with current property values. Finally, you’ll need to provide the lender with a copy of your VA preapproval letter from a lender. The lender needs to be convinced that a short sale is needed, the contract reflects market value and there is an approved buyer, you, waiting in the wings.
Short sales used to take quite a long time to get processed because the lenders weren’t staffed with experienced personnel to process them. However, due to the number of short sales over recent years, completing a short sale is very near the same as buying and financing a property without a short sale request.