Seller Qualifications for a Short Sale
With my first short sales in 1992, the seller had to be totally destitute to qualify with their bank for a short sale. If they had any money, or any way to get some money, they bank wanted it. If you were a bank, you would not want to let a borrower get away without paying you back unless there was no way they could pay you back.
Now, the qualifications are easier. Software has even been created to review the qualifications of a seller for a short sale. Just like Desktop Underwriter will review whether a borrower is qualified to receive a loan, this software will review the seller’s qualifications for a short sale.
The borrower cannot have sufficient assets to come to the closing with the money necessary to pay the loan in full. Some people say that the seller has to be insolvent. That is a bit stronger than necessary. The borrower does not have to be totally bankrupt, just unable to use any assets to raise the money to pay the balance due on the loan.
The second thing that will make it easier for the bank to approve the sale is if the seller has a negative cash flow. In other words, if the seller has less money coming in than what is going out, every month the seller is short of money to pay the household obligations. This is where some sellers will hurt themselves. Most people are used to filling out financial statements to make themselves look good. They have a hard time facing their financial problems so they will fill out their financial statement to show that they balance each month i.e. the same amount of money comes in as goes out. Encourage the sellers to be honest, if they are financially losing ground every month, put it down that way.
The third thing the lenders look for is financial hardship. The hardship letter is discussed in detail in a separate post. You want to show a reason for a change in the financial situation from when the loan was originated to the present. So, if the sellers lost a job, watched their business fail, had the mortgage payments adjust, had a family tragedy or had a medical problem, show the financial consequences of the hardship.
Having poor credit is a problem for getting a loan. Having poor credit is no problem for getting a short sale. Do not worry that the credit is bad. It should be if there is serious financial distress. But, bad credit is not a requirement for a short sale, as I have done a number of short sales for people who have made every payment right on time.
Qualifying for a short sale is the reverse of qualifying for a loan. To get the loan, you have to show that you have a positive cash flow, plenty of assets in reserve and no financial problems. To get a short sale, you have to show a negative cash flow, minimal assets and serious financial problems.