An Introduction to Real Estate Short Sale Hardship Requirements

As I discussed in a companion article ("An Objective Look at Real Estate Short Sales") 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.

As I said in the previous article, lenders are not happy about short sales because, like anyone else, they hate losing money! That 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. Below, 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 overwhelm a family and its finances. With today's soaring medical costs, it doesn't take long to drain a family's bank account. When this happens, debts mount quickly, and soon the borrower is unable to meet the mortgage payment.

Death

The death of a spouse, especially if he or she was the primary bread winner, can create havoc on 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 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

In many cases, when borrowers lose their jobs due to downsizing, company closings, or other factors, they aren't able 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 various 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 occurs when due to economic conditions (local or national) beyond the owner's control, the home's value has dropped to a value below the loan balance.

A fourth reason relates to the "as-is condition of the property. Sometimes, properties deteriorate almost beyond repair, making it impossible for the lender to put it back into resale condition.

A final factor prompting 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 definitely 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.

Jack Sternberg