Everything is cyclical. Especially in real estate. After the rapid ascent of home values and the frenzied multiple-offer and over-bidding situation in the 2003-2006, we are seeing just as rapid a descent to short sales and foreclosures.

Here are the foreclosures stages:

• Before foreclosure. Homeowners is a distressed stage, looking to salvage finances and credit rating. May negotiate mortgage rate or payment plan, may need to sell home.
• Foreclosure. Homeowner unable to keep up with, or may have missed mortgage payments, has proved to be a hardship case at which point the property if offered as a short sale. Generally, if three or more payments are missed,  and the homeowner has no means to make up the missed payments, Notice of Default (NOD) is filed. Lender is involved. If not sold within a certain period of time, property may be sold at auction.
• Post Foreclosure. Control of the property has transferred either to the Lender's REO (Real Estate Owned Department) or to new owner who bought the property at auction.

Short Sale Before Auction

Short Sale is where the property's lender agrees to sell the property at less than the full amount owed on the property, and receives the proceeds from the sale. This occurs before the property is sold at a public auction. The keywords are: Lender must agree.

Why Lenders May Approve Short Sale

Lenders may approve the short sale as a last resort before foreclosure because

1. The borrower is insolvent
2. The proposed purchase price is more than the lender would be able to sell the property after foreclosing on the loan
3. The value of the property has decreased to an amount that is below the loan balance due to local and national economic conditions
4. The property was refinanced at a higher value based on an inflated property appraisal report, or
5. The property is in such a physical condition that it is not financially feasible for the lender to put it into a marketable condition.

Home owners Must Prove Hardship

But before the lender approves a short sale, they have a very stringent hardship test that the financially distressed homeowner must meet. Following are some examples of hardship:

• Unemployment

• Reduced income

• Divorce

• Separation

• Medical bills

• Too much debt

• Death of spouse

• Monthly payment increases

• Business failure

• Job relocation

• Illness

• Damage to property

• Military service

• Incarceration

Documents Lenders Need To Approve a Short Sale

Sellers should immediately engage a real estate professional to market the property for sale as soon as it is determined that a short sale is necessary. Don't wait until you receive a notice of default or notice of a trustee sale before you initiate the process for a short sale because this requires a lot of preparation and a longer time.

1. Sellers should provide letter of authorization for the real estate professional to communicate directly on their behalf, with the lender(s) and/or lien holder(s)
2. Sellers should provide the documentation that the lender(s) require prior to approving a short sale:
   1. Hardship letter explaining the circumstances that led to the sellers to ask for a short sale
   2. 2 recent pay stubs
   3. 2 recent tax returns
   4. 2 recent bank statements
   5. Financial statement of monthly income and expenses
   6. Recent loan payment coupon(s)
   7. Address and Account Number for all Lien Holders

Here are some key points a homeowner should know or remember: 

Reinstatement of Loan.

When Lender files Notice of Default, options for homeowners decline since banks hesitate to reinstate loan after starting foreclosure proceedings. Some lenders may give homeowner time to make payments current, pay foreclosure filing fees.