Short sale, tall order

If a short-sale borrower owes $500,000 on a home, the bank may accept a payoff amount of $450,000, the amount a buyer has offered to pay. The sellers need not be in default -- meaning they stopped making mortgage payments -- in order for a lender to consider a short sale, but they must be able to show a real hardship to receive the debt forgiveness, which may have tax consequences.

Then there's the wait

It sounds straightforward, but the short-sale road is a long one. Once sellers have an offer, they must assemble a package to present to the bank, including a "hardship letter" explaining why they had to put the house up for sale -- loss of employment, a spousal death, a divorce, a disability or a mortgage resetting, for example -- and asking the bank to accept a short sale, according to a Countrywide spokeswoman.

The sellers also must provide income verification, their most recent bank and income-tax statements, the listing history of the house and other documentation. Then comes the wait. And frequent follow-up calls to the bank to make sure the file isn't buried.

"Banks won't grant face-to-face interviews because of the volume of short sales and foreclosures," said Mary Ebersole, a Re/Max Realty Specialists agent in Long Beach. Even if the seller gets approval, she added, "there's only room for cautious optimism."

That's because impatient buyers sometimes head elsewhere while the bank's loss-mitigation officer, or negotiator, sifts through the pile of short-sale packages. Or buyers put offers on five or six other properties to see which comes through first.

Sometimes, while awaiting a bank's decision, interest rates go up and buyers no longer qualify for a previously approved loan because their lock-in rates expired. Worse yet, a seller may get an initial approval from the bank, but in the eleventh hour the bank adds a contingency that skewers the deal, or pulls the plug without explanation, agents say.

Second and third mortgages and even home equity loans can further complicate matters. Last fall, Pam Kennedy, a Coldwell Banker Ambassador agent in Whittier, was disheartened when her short-sale client's lender demanded, after a long wait and with a buyer already on board, that the seller sign a promissory note for $15,000, which would be interest-free and amortized over 10 years. The seller had taken out a second mortgage awhile back to buy a recreational vehicle for $25,000 and pay off some debt. The lender wanted to recoup some of the loss it was absorbing.