The short sale process varies greatly depending on what type of loan you have. In fact, the timing of when to submit your loan documents changes based on your loan type.
FHA Loans
FHA loans were certainly not in the majority of the loans being shorted initially. However, as foreclosures and short sales have pulled home prices downward, all sorts of loans are now falling into short sale status and we are seeing more and more FHA loans.
Doing a short sale on an FHA loan is the most simple because the guidelines are set by the government and don't change. If you have an FHA loan your Realtor will first have you complete all the financial documentation and send it in to the bank BEFORE you even put your home on the market. This is because HUD must approve you into the Short Sale Program before the bank is allowed to review any offers.
Once you are accepted into the Short Sale Program, HUD will tell you exactly how much they need to net so it is simple to market the property at a price that will bring that net. Once you have the offer, your Realtor must send it along with an estimated Settlement Statement (HUD-1) to your negotiator at the bank for final written approval.
VA and Conventional Loans
The process to short sell a VA or conventional loan is the opposite of the short sale process on an FHA loan. In this case, the bank requires that an offer be presented before the short sale can be approved. With some banks it is still helpful to send financial information on ahead of the offer, but the banks won't give you any kind of approval until you have an offer in hand. A good short sale listing agent will at a minimum have you sign a bank authorization letter and send it in to the bank so that the bank has permission to speak to your agent about the loan even before you get an offer. The faster you can make the short sale process for your buyer, the greater the likelihood that the buyer will stay engaged and wait long enough for the bank to approve the offer.
Bank Thresholds
Depending on the type of loan, the banks will be required to meet a certain threshold in terms of what they are netting. With conventional loans this threshold can sometimes be negotiable especially if there are extenuating circumstances. With VA and FHA these thresholds are firm. The threshold is a certain percentage of market vaule and the bank must net that AFTER paying commissions and other closing costs. Market value is determined by the Broker's Price Opinion (BPO) or Appraisal that is ordered by the lender (seller's) as part of the short sale approval process. Whether buying a short sale or selling your home as a short sale, it is wise to select a Realtor who is familiar with how banks operate based on the type of loan the seller has. You will have a much smoother short sale if you do.
