Friday, March 27, 2009

Ask Erin: What type of hardship must I demonstrate in order for my lender(s) to consider my request for a short sale?

I received a call today from a very friendly man seeking information regarding the possible short sale of his house. When I asked what his hardship scenario was, he informed me that he had no hardship, but just wanted to dump his home because he owed more than it was currently worth. I asked a few probing questions...and he made plenty of money, could afford his payments, and was not pinched financially. Hmm...

Generally speaking, in order for a lender to consider a home owner's request for a short sale, the home owner must be able to demonstrate that there is some sort of pressing hardship. Hardships do not necessarily have to be financial in nature, but there usually must be some substantial burden that affects the homeowner's ability to continue to make the monthly mortgage payments.
  • Loss of earnings. With state/local government employee furloughs, reduction of hours, cutbacks, layoffs, etc, this is probably the most common hardship for short sales that I negotiate. Loss of earnings is pretty simple to document through providing bank statements, or unemployment benefit statements to the lender(s).
  • Interest rate adjustment. Many borrowers purchased or refinanced with adjustable rate mortgages (ARM's) or negatively amortizing loans, and simply can not afford the inflated mortgage payments once the resets occur. Many lenders are willing to modify the terms of ARM or Neg-Am loans, but many home owners opt to short sell due to this hardship. This is also a very straightforward hardship to document to the lender via bank statements and paystubs.
  • Dissolution of marriage. When spouses separate, and one household becomes two, it is common that neither spouse can separately afford to keep the house. Often times this hardship must be proven to the lender(s) by providing a copy of any applicable court filings.
  • Relocation. Often times families must relocate for one reason or another; for employment opportunities, education, etc. Often times this hardship must be proven to the lender(s) by providing copies of education or employment welcome letters.
  • Disability or death. Perhaps one of the co-borrowers passed away, or was disabled, leaving the other borrowers or heirs to deal with the mortgage payment. Often times this hardship must be proven to the lender(s) by providing copies of death certificates, or other documentation from qualified medical professionals regarding the disability.
  • Birth of a child. Perhaps you had a child, and had to take time off from work. Perhaps you have additional childcare expenses, another mouth to feed, etc. Often times this hardship must be proven to the lender(s) by providing copies of birth certificates.

There are many other reasons that lenders will consider allowing a short payoff of a property too. Please keep in mind that if you are merely upside down in your house, but do not have some external circumstances that affect your ability to make your monthly payment obligations - your request for a short sale may be rejected by your lender if you have the ability to pay, or you could be asked to contribute cash to close your sale, or you could be asked to repay a promissary note over time.


Uppal Insurance said...

Great Post Erin!
This down economy is causing others to look into routes that they "think" they are in or just abuse the situation!!
Whichever is the easiest way out!

Anonymous said...

There is nothing wrong with walking away from a home that will NEVER appreciate to its previous value.