RI Real Estate: Short Sale F.A.Q.s

1.     What is a short sale? A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property's loan and/or other liens.

2.      How does the short sale process work? Initially, the sale of your home would be handled like any other sale. Once an offer has been accepted by the seller, the bank goes through its internal process including; bank acknowledges receipt of short sale package, a negotiator is assigned, an appraisal is ordered, file is sent for investor approval, bank may request that all parties sign an Arm’s Length Affidavit; bank issues a short sale approval letter.

3.     What type of documentation needs to be prepared in order to do a short sale?  Typical documentation may include a letter of Authorization, which lets agents/lawyers speak to the bank, a hardship letter, proof of your financial situation-Income/Expense, two years of tax returns, two years of W-2s, two to three months of bank statements, all Mortgages with account numbers, recent payroll stubs, the offer, a broker's price opinion on the property showing that the offer isn't too outlandishly low, pictures and information on the property including work that may need to be done to fix it up.

4.     If I have multiples mortgages, can I still do a short sale? Yes, you can do a short sale with multiple lenders, although approval will need to be given by each individual mortgage holder.

5.     What is cost of a short sale transaction to the seller? Typically there are no upfront costs to the seller for doing a short sale. Most lenders will pay the legal fees and real estate commissions. 

6.     Will banks allow a short sale when the owner has some or a good amount of equity? If a home has substantial equity, the lender would foreclose on the property, resell for market value and recoup the debt owed to them. Homes with equity are not good candidates for short sales.

7.     Can an owner profit from a short sale? The seller cannot monetarily profit from a short sale. All proceeds would go to the lender to partially satisfy the seller’s debt obligation. There may be other benefits like piece of mind and debt forgiveness.

8.     What happens to the seller's credit rating when they allow an investor to short sell their property? What typically happens is the loan will show up as "paid" on their credit report; however there will be a notation that says "settled for less than originally owed" or something similar. It is more favorable for a homeowner to short sell than to have a foreclosure on their credit report.

9.     What are the possible outcomes of a short sale? Typical outcomes are as follows:balance negotiated away, lender retains the right to seek a deficiency judgment, 1099 issued for forgiven mortgage debt and lender may require a promissory note, typically for a portion of the outstanding balance.

10.  I am current on my mortgage; will a lender consider a short sale? You do not need to be behind in payments, but the bank will need to see that you have some sort of hardship. Examples of hardship include, but are not limited to; loss of job, divorce, a catastrophic medical event, job relocation, or death in the family.