Short Sale Hardship Requirements-An Introduction
A short sale is the sale of a house in which the proceeds fall short of what the owner still owes on the mortgage.
I’d like to make you familiar with the hardship tests required to qualify a home owner for a short sale. This information will help you understand the market better as an investor and aid you in zeroing in on the best deals.
Naturally, lenders are not happy about short sales because, like anyone else, they detest losing money! This means they consider a short sale a last resort, and they’re going to make sure the defaulting owner meets their hardship tests before anything else happens. In this article, I cover the typical tests that must be met before a property qualifies for a short sale:
Bad Health Chronic or catastrophic health issues can have a huge negative impact on a family and its finances. With today’s ever-rising medical costs, it doesn’t take much time to empty a family’s bank account. When this happens, debts accumulate fast, and soon the borrower can’t meet the mortgage payment.
Death The death of a spouse, especially if he or she was the primary bread winner, can severely damage a family’s finances, especially if they bought too much house to begin with.
Divorce No secret–divorce can be expensive! In some cases, when income drops dramatically, this requires that a jointly-owned home be sold.
Military Call Ups When soldiers are called up, they can take a big hit in terms of income, especially if they’re required for long tours of duty. Note: Lenders consider this a true hardship since it’s out of the control of the borrower and in service of the country.
Job Transfer In some cases, an employer transfers a borrower to another area and his or salary drops instead of increasing. If the owner is unable to sell or rent the property, then the hardship test is met.
Disability When a borrower suffers an injury or disease severe enough to cripple or end income, then, obviously, he or she can’t meet the mortgage payments, and the property is taken back.
Job Loss When borrowers lose their jobs due to downsizing, company closings, or other factors, they’re often unable to meet mortgage payments because most haven’t saved enough to cover expenses.
Additional Factors Beyond the standards listed above, there are sometimes other factors that create a short sale situation.
One is that a property was bought at an inflated price. In the meantime, the market has dropped dramatically due to negative economic conditions.
Another is that a property has been refinanced at, say, 125% of value, and that value was based on an over-inflated property appraisal report. Then, the area in which the home is located takes a severe economic hit, drastically dropping property values.
A third factor happens when due to economic conditions (local or national) beyond the owner’s control, the home’s value drops to a value below the loan balance.
A fourth factor relates to the “as-is condition of the property. Sometimes, properties deteriorate almost beyond repair, making it next to impossible for the lender to put it back into resale condition.
A final factor causing a short sale happens when the purchase price of the home is more than the lender is able to sell the property for after foreclosure.
To conclude, short sales are an unhappy time for anyone for obvious reasons–except the knowledgeable investor. However, remember that short sale opportunities don’t occur all that often when compared to other types of investments. Yes, you can pick up some wonderful bargains, but you will definitely have to invest more “sweat equity” in terms of time and patience than, for example, foreclosures, rehabs, and other forms of deals.
Key Concept: Be completely familiar with the entire short sale process before engaging in any deals.
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