Short Sale Hardship Packages–What's Inside

What’s in a short sale seller’s hardship package?

Answer:  A lot of paperwork.  The bank will require you prove hardship and back up your story with documentation.  If you are considering a short sale (see  Short Sale Hardship–The Hard Part) you’ll need to begin your data collection sooner than later.  Below is a list of what you’ll need:

  • Hardship letter (written by you and explains  your situation in a couple pages)
  • Two year’s tax returns
  • Most recent pay stubs (W2s)
  • Profit & Loss Statement (if self employed)
  • Household budget
  • Three months of bank statements
  • Copies of bills or other debt
  • Personal or business bankruptcy documentation (if relevant)
  • Anything else on your bank’s requirements list.

In order to determine your hardship package requirements, contact your lender’s short sale, loss mitigation, and/or homeowner’s assistance department.  Any misrepresentation on the part of the borrower/seller can result in financial and/or criminal penalites.  A lender may even refer to the original loan application to check on your story.  So, proceed with caution and your integrity in tact.

Up next:  Writing a good short sale hardship letter

Short Sale Hardship–The Hard Part

Tired of making your payment? Maybe thinking it will take too long to recoup your investment and just think it would be easier to short sell? Well, sorry to spoil your plans, but a bank won’t think so highly of your strategy.

What does short sale hardship mean?

It is not enough to have a big 1st loan, a fantastic remodel (and therefore hefty 2nd mortgage), and own a home worth less in today’s market than the sum of the two loans.  Tired of making your payment?  Maybe thinking it will take too long to recoup your investment and just think it would be easier to short sell?  Well, sorry to spoil your plans, but a bank won’t think so highly of your strategy.

For a bank to approve a short sale, as the seller, you must prove hardship.  If you’re a commission salesperson and you’ve had a slow month, or if your bonus this year was less than last year, join the club.  This will not suffice.  Hardship needs to be major financial distress.  It needs to be over a sustained amount of time, for uncertain duration, and verifiable; meaning, the bank will ask you to back up your statements with lots of documentation.  Making stuff up won’t cut it, and will possibly put you at risk for fraud with legal and financial repercussions.

How will the bank decide if I qualify for short sale hardship?

Bank short sale departments (also called Loss Mitigation, Home Owner’s Assistance, Home Retention, etc. departments) look for the 3 M’s:  Money, Medical, and Marital hardship.  All three involve money–usually a lack of it or a great need for more–and a future need to conserve savings.  Here is a short list of possible short sale hardships that a bank will take seriously:

  • Loss of job
  • Closing of business
  • Personal or business bankruptcy
  • Prolonged loss of rental income
  • Death of spouse/income earner
  • Major health problem and expense
  • Divorce or separation
  • Military deployment resulting in loss of income.

This list is by no means exhaustive, but it will give you an idea of what a bank might consider a legitimate short sale hardship.

Next up:  What’s in a short sale hardship package?

Short Sale Snoop…Recording Vs. Receipt of Funds

I just closed escrow on a short sale where I represented the seller.  The first lien holder (lender), approved the short sale, provided that the they were in “…receipt of funds no later than June 25, 2010.”

As luck would have it, the new buyer’s loan did not fund until the afternoon of the 25th.  This posed a problem, as the title company could record and close escrow by the deadline, but they would miss the afternoon wire cutoff, and the lender would not receive their funds until the following Monday.  Title, therefore, would not record and close escrow without something in writing from the lender expressing their approval to receive funds after the 25th.

When I explained title’s concern to the lender’s short sale negotiator, she said that what we were requesting was an extension, and any extension request must be submitted to the audit department, approved by the investor, and would require daily penalties to be paid by the buyer.  This was looking like it would drag on well into the next week.

Further complicating the matter was the lender’s refusal to communicate directly with escrow or title, as they were not an approved third party to the agreement, and so they were not authorized to discuss the transaction with anyone other than the seller, and me, the listing agent.  So, I would have to be available to receive and distribute any communications between all parties.  Mind you, I was preparing to leave on a vacation Sunday.

Frustrated, I reminded the negotiator that we weren’t actually extending, and in fact wanted to close that afternoon.  We put our heads together and she said, “How about an email from me that says we’ll just accept the funds on the 28th?”

“Done,” I answered.  So, with that email in hand, I called the title officer who then informed me that would suffice.  We recorded to meet the lender’s deadline for closing, and they received funds three days later on Monday.

The moral of the story?

  • Keep it simple–no formal request or letter, “just email me”
  • Have Seller authorize escrow and title officers as 3rd parties with short sale lender
  • Have a listing agent who is hands on and technologically savvy.