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Short Sale Hardship Requirements-The Basics

Mar 11, 2008
A short sale is the sale of a house in which the proceeds fall short of what the owner still owes on the mortgage.

In this article, I'd like to make you familiar with the hardship tests required to qualify a home owner for a short sale. This knowledge will help you understand the market better as an investor and enable you to zero 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 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 suffer 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.

Other Factors Beyond the standards listed above, there are sometimes other factors involved in producing short sales.

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 fifth factor causing a short sale is when the purchase price of the home is more than the lender is able to sell the property for after foreclosure.

In summary, short sales aren't a happy time for anyone for obvious reasons--except the knowledgeable investor. However, keep in mind that short sale opportunities aren't all that frequent, compared to other types of investments. You can pick up some great bargains, but you will definitely have to invest more "sweat equity" in terms of time and patience than, say, foreclosures, rehabs, and other forms of deals.

Key Point: Be completely familiar with the entire short sale process before engaging in this market.
About the Author
Jack Sternberg is the creator of the renowned "Buyers First Program". As the "gurus' guru", he is well known by the professional creative real estate community as "Obi-Won Kenobi". Having been a full time investor since 1977, Mr. Sternberg has been "at" the closing table more than 1,500 times. Mr. Sternberg has the depth of experience that lend value to his associations. Contact Mr. Sternberg at www.askjacksternberg.com
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