A short sale is the sale of a house for less than the amount remaining on the mortgage. Typically, the reason for a short sale is an owner has fallen behind on mortgage payments and wants to avoid foreclosure. A bank may agree to allow the short sale because when factoring in foreclosure costs and maintenance on the house pending sale, it may come out ahead financially.
It should be noted that a short sale does not necessarily lead to forgiveness of the remaining balance of the mortgage — this must be separately agreed to unless it was specifically provided for in the original mortgage.
1. Gather Evidence of Financial Hardship
To convince the bank to allow a short sale, you need to explain why you will not be able to pay the full amount of the mortgage. Prepare documentation of your income, expenses, and any special circumstances such as job loss, medical problems, or any other information that might garner sympathy.
2. Request Permission from the Bank
With that information in hand, ask the bank to allow a short sale. Selling a house with a mortgage almost always makes the full mortgage balance immediately due without prior arrangements.
If you are using an attorney or real estate broker to work with the bank, you will need to provide written authorization to the bank allowing them to act on your behalf.
3. Get a Valuation of Your House
This is necessary to ensure a smooth transaction and otherwise protect yourself. Especially if the bank has agreed to forgive any remaining balance after the short sale, they will be wary of any selling price they feel is below the true market value of the house.
Banks typically retain veto rights over any sale, so to ensure the transaction goes through and the bank doesn’t accuse you of acting in bad faith, obtain a market value and set the initial selling price above it; drop the price gradually only after some time has passed.
4. Complete the Sale
After receiving an offer, the bank will need to approve. This could take months, but if you’ve done your homework as advised above, you may be able to obtain a faster approval by showing the bank that they’re getting a good deal.