There is an overall big picture for short sales but the process is different for the buyer or seller. This flow chart outlines the process for the seller. This is a simplified version of a complex process so do your due diligence.
The term “Short Sale” is used to refer to those real estate transactions in which the agreed-upon purchase price is insufficient to pay off all of the secured debt on the property (such as mortgages, trust deeds, state/federal income taxes, liens, property taxes or other local assessments) including the costs of closing, such as escrow and recording fees, title insurance premiums, real estate commissions, etc. —Short Sales- A Summary For Sellers by OREF
Two goals going into a short sale for a seller are to avoid foreclosure and to close the transaction without having to sign a promissory note for the deficiency, or the amount of money the bank is shorted in order for the bank to agree to release the loan. It may not work out that way but that is what everyone should be working towards. The decision to enter into a short sale transaction has legal and tax implications so an attorney and accountant should be consulted. There are also long term credit and FICO score ramifications.
Continued below graphic.
One feature of a short sale is that the seller have a documented hardship. A bank is unlikely to approve a short sale if the seller has the financial means to pay the debt and no hardship but simply doesn’t want to. Even with a hardship, there is nothing to say that a bank must approve a short sale. Hardships include, but are not limited to: a loss or reduction in employment and/or income, divorce, death in the family, military service, exotic loan resets, and illness. The bank will also ask for financial documents and require that they be updated once an offer is received.
The time frame for short sale could be weeks or months. Each bank handles short sales according to their own rules and if there is a second bank and a second (or third (and we’ve seen a fourth)) loan the process is longer and more complex. Logic may dictate that “something is better than nothing” and that banks shouldn’t be in the business of being homeowners but that doesn’t always translate to a successful short sale even when all the hoops are jumped through and there is a ready and willing buyer.
At the end of the day it is the seller that has to accept the bank’s terms of approval. The seller is not required to sign a promissory note or accept any other encumbrance through the sale, regardless of what the contract between the buyer and seller says. The result may be foreclosure or bankruptcy but that is a seller not bank made decision if there is approval from the banks.