What Gives? Why are Short Sales So Complicated?!

This is a question I hear on a daily basis.  It’s important to understand and accept that a short sale will take longer than a straight equity sale, and even a bank owned home in most cases.

Here’s a quick break down of the overall process, and why it seems to take so long.

 

  • Once an offer is made it has to first be accepted by the home owners.  This is usually not a difficult step, as the average home owner is not overly concerned with the net sheet because it’s ultimately not that person’s net loss.
  • After the homeowner accepts the offer, their agent then submits it to the bank(s).  In the best case scenario, the subject property will only have one mortgage, and in turn one bank to negotiate with.  We’ll assume that this the case for now, and then go over the possible differences at the end of my spiel.
  • Normally, the agent will put together a short sale package containing a myriad documents that are requested by the bank to go along with the offer.  Each bank has its own requirements, but almost all banks will ask for the following:
  1. Listing Agreement
  2. MLS history for the property
  3. Comparable Listings to justify the list price (usually 3 active, 3 sold, and 3 pending if possible)
  4. Executed Purchase Agreement
  5. Pre-Approval letter or Proof of Funds for the buyer making the offer
  6. A HUD-1 Statement for the purchase (this breaks down the banks expected net loss from the sale after all fees are accounted for)
  7. Financial Statements for homeowners applying for the short sale including but not limited to: bank statements, retirement accounts, investment portfolios, pay stubs, evidence of other income, a signed 4506-T granting the bank access to your tax returns, a completed budget worksheet which breaks down the homeowner’s end-of-month net after all necessary expenses are deducted from their gross income, etc.
  8. A well written, one page hardship letter explaining what event(s) have occurred that have left the homeowners less able to pay their monthly mortgage payment than they were on the day they were approved for their home loan.  It’s important to note that being upside down in itself is not generally accepted as being a true hardship for the purposes of a short sale.  There must be an extenuating circumstance that lessens your ability to afford your regular payment, i.e. loss of employment, death in the family, unexpected medical expenses, an adjustment in your ARM loan, reduction in income, or some other catastrophic event.
  • When your agent submits this well organized package to the bank, there will be an administrative person who receives it from the bank’s short sale department in most cases.  This person’s function is to ensure that the package is complete and ready to be reviewed for negotiation. If your package is not complete, it will not be sent to a negotiator’s desk, so make sure everything is done right the first time around.
  • Once your file has been reviewed and accepted as a complete package it will then be assigned to a negotiator.  This alone may take two to three weeks.  Keep in mind that yours is just one of many files on the negotiator’s desk, which will absolutely mean a delay between the time he/she receives your file and the time he/she actually begins reviewing it.
  • The negotiator’s job is to protect the bank financially.  He/she needs to examine the numbers and ensure that the net loss on the short sale will overall be less expensive than a foreclosure would potentially be.  He/she also needs to determine that foreclosure is eminent if a short sale is not approved (this is where all of those financial documents and hardship letter come in).  Keep in mind that in most cases the bank sells off mortgage debt to third party investors which means the bank must be able to justify any losses to those individuals.

IF the homeowner can be financially interpreted on paper as being able to afford the mortgage payment, then there is no real reason for the bank allow that person to do anything less than what was agreed upon in their contract- which is pay the full amount due, with interest, as promised .

IF though, that person’s financial situation has drastically changed and it’s clear through their financial records and hardship letter explanation of their circumstances, that there is just no possible way for them to continue paying the loan payments, regardless of whether or not a short sale is granted, and if it isn’t granted then the home will in all likelihood end up in foreclosure (an expensive process in itself), then the bank will be more likely to negotiate for an acceptable loss.

  • Usually the negotiator will calculate a “Magic Number” so to speak that the bank needs to be able to net in order for it to be financially sensible for them to accept a short sale, but of course they will not normally share this number with the agent until the very end of negotiations (if at all) in an effort to maximize their earnings from the sale.  They will then take the difference between that number, and the number at hand with the given offer on the table and attempt to trim costs as necessary.  They may do this any number of ways.  For example: it’s very rare that a bank will pay any non-essential fees, or costs that could potentially be passed on to the buyer (i.e. home warranty, closing costs, excessive commissions, etc.)
  • Once all of this back and forth has been handled you might be ready to close!  UNLESS THERE ARE SECONDARY LIEN HOLDERS (and there often times are).
  • IF the property has a 2nd mortgage and/or a HELOC you will need to negotiate a payoff with them as well.  All of the same rules that come with negotiating with the 1st bank will apply to the other bank(s) involved in the financing.  Other possible lien holders include Home Owner Associations, or government entities for unpaid tax liens.  Each secondary lien holder will have to be settled independently of each other.  Once the secondary lien holders have agreed upon their respective payoffs, your agent will then add their payoff amounts to the HUD-1 to be paid through escrow once the home is sold.  The bank that holds the 1st mortgage must agree to the payoff amounts for each secondary lien holder, and each secondary lien holder must be paid through escrow.  It is ILLEGAL for a buyer to pay a secondary lien holder outside of escrow!

If all the payoffs have been negotiated and approved by the 1st lender, AND if the remaining balance after those payoffs are made is still enough to satisfy the 1st mortgage’s previously mentioned “magic number” THEN you will have the makings of a successful short sale.  Of course all of this is dependent upon a very strict time table, because in many cases there may be a looming foreclosure on the horizon.

Bottom Line? Short Sales are complicated, and time consuming, and stressful.  That’s just part of the deal.  They are also a means of salvation for the struggling home owner under water who is looking to minimize the long term damage to their credit so that they can start rebuilding towards future home ownership.  AND they are often competitively priced because of the added frustration that comes along with the process, which means a golden opportunity for buyers on a budget!

Feel free to contact me if you have any questions or concerns specific to your situation that I may be able to address for you.  Before you consider a short sale, I highly recommend you speak with a real estate attorney to determine the possible consequences that may or may not apply to your unique situation.

From the first time home buyer to the savvy investor – from the seller with equity to the seller underwater and needing options – I am here for you.

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A Short Sale Vs A Foreclosure – What’s the difference?

In short, a short sale is much less damaging to the seller than a foreclosure would be.  The table below summarizes exactly why that’s true.  It’s important to note though, that not everyone will qualify for a short sale.  Feel free to call if you have any questions or concerns regarding your own home, and what your options may be.

From the first time home buyer to the savvy investor – from the seller with equity to the seller underwater and needing options – I am here for you.

Issue

Foreclosure

Successful Short Sale

Future Fannie Mae Loan – Primary Residence (effective May 21, 2008) A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years. A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage only after 2 years.

Future Fannie Mae Loan – Non Primary (effective May 21, 2008)

 

An Investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years. An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.

Future Loan with any Mortgage Company

 

On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This will affect future rates.

There are no similar declarations or question regarding a short sale.

Credit Score

 

Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.

 

 

Only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale’s effect can be as brief as 12 to 18 months.

Credit History

 

Foreclosure will remain as a public record on a person’s credit history for 10 years or more.

 

A Short sale is not reported on a credit history. There is no specific reporting item for “short sale” The loan is typically reported “paid in full, settled”.

Security Clearances

 

Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance, in almost all cases clearance will be revoked and position will be terminated.

A Short Sale on its own does not challenge most security clearances.

 

Current Employment

 

Employers have the right and are actively and regularly checking the credit of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination.

A short sale is not reported on a credit report and is therefore not a challenge to employment.

 

Future Employment

 

Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.

A short sale is not reported on a credit report and is therefore not a challenge to employment.

 

Deficiency Judgment

 

In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.

In some successful short sales it is possible to convince the lender to give up the right to pursuit of a deficiency judgment against the homeowner.

Deficiency Judgment (amount)

 

In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.

In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency.

Issue Foreclosure Successful Short Sale
Future Fannie Mae Loan – Primary Residence (effective May 21, 2008) A homeowner who loses a home to Foreclosure is ineligible for a Fannie Mae backed mortgage for a period of 5 years. A homeowner who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed mortgage only after 2 years.

Future Fannie Mae Loan – Non Primary (effective May 21, 2008)

 

An Investor who allows a property to go to Foreclosure is ineligible for a Fannie Mae backed investment mortgage for a period of 7 years. An investor who successfully negotiates and closes a short sale will be eligible for a Fannie Mae backed investment mortgage after only 2 years.

Future Loan with any Mortgage Company

 

On any future 1003 application, a prospective borrower will have to answer YES to question C in Section VIII of the standard 1003 that asks “Have you had property foreclosed upon or given title or deed in lieu thereof in the last 7 years?” This will affect future rates.

There are no similar declarations or question regarding a short sale.

 

Credit Score

 

Score may be lowered anywhere from 250 to over 300 points. Typically will affect score for over 3 years.

 

 

Only late payments on mortgage will show and after sale mortgage will be reported as paid or negotiated. This will lower the score as little as 50 points if all other payments are being made. A short sale’s effect can be a brief as 12 to 18 months.

Credit History

 

Foreclosure will remain as a public record on a person’s credit history for 10 years or more.

 

A Short sale is not reported on a credit history. There is no specific reporting item for “short sale” The loan is typically reported “paid in full, settled”.

Security Clearances

 

Foreclosure is the most challenging issue against a security clearance outside of a conviction of a serious misdemeanor or felony. If a client has a foreclosure and is a police officer, in the military, in the CIA, Security, or any other position that requires a security clearance, in almost all cases clearance will be revoked and position will be terminated.

A Short Sale on its own does not challenge most security clearances.

 

Current Employment

 

Employers have the right and are actively and regularly checking the credit of all employees who are in sensitive positions. A foreclosure in many cases is ground for immediate reassignment or termination.

A short sale is not reported on a credit report and is therefore not a challenge to employment.

 

Future Employment

 

Many employers are requiring credit checks on all job applicants. A foreclosure is one of the most detrimental credit items an applicant can have and in most cases will challenge employment.

A short sale is not reported on a credit report and is therefore not a challenge to employment.

 

Deficiency Judgment

 

In 100% of foreclosures (except in those states where there is no deficiency) the bank has the right to pursue a deficiency judgment.

 

In some successful short sales it is possible to convince the lender to give up the right to pursuit a deficiency judgment against the homeowner.

Deficiency Judgment (amount)

 

In a foreclosure the home will have to go through an REO process if it does not sell at auction. In most cases this will result in a lower sales price and longer time to sale in a declining market. This will result in a higher possible deficiency judgment.

In a properly managed short sale the home is sold at a price that should be close to market value and in almost all cases will be better than an REO sale resulting in a lower deficiency.