A Short Sale Synopsis

Considering the current state of today’s real estate market, short sales are going to become common occurrence. Being familiar with them and the process of achieving them is going to be an important benefit to those in the industry.

A mortgage servicer may be willing to pursue an arrangement of this kind in a foreclosure situation, provided the sale of the property has not been completed. Even FHA and VA servicers will often consider a short sale, provided they can comply with the insurers’ or guarantors’ guidelines.

When listing a property where a review of the seller’s financial circumstances reveals that a that a short sale may be necessary, a market analysis will further help to determine if the seller will need to bring funds to closing. If this is the case, and those funds are not available to your seller, then process of requesting a short sale should begin.

Your listing agreement should have a cancellation clause in the event you cannot complete a short sale arrangement with the mortgage servicer. An example of such would be “Seller may cancel this agreement prior to the ending date of the listing period without advance notice to broker, and without payment of a commission or other consideration, if the property is conveyed to the mortgage insurer or the mortgage holder”. In addition, the agreement should be subject to the lien holder’s approval of the short sale.

The seller will need to provide the lender with financial information to prove that the seller does not have the ability or the assets to bring funds to the table. This typically includes copies of recent pay stubs, federal income tax returns, a financial hardship letter, a preliminary HUD statement, and a copy of the contract. (Occasionally the lender will start the process before the contract stage. In this case a market analysis will be required.) In addition, some lenders may require reviewing a copy of the appraisal. They are looking to verity that the value truly is not there.

When there is a second mortgage on the property, the process becomes a little more difficult. The first lien holder has the ability to wipe out the second mortgage debt in the foreclosure, and therefore may be reluctant to give up a portion of their payoff so that the second mortgage lien holder can also receive funds.

There is a motivating factor for mortgage servicers and lenders to participate in a short sale. A foreclosed loan can reflect negatively on their history, and their standing with FNMA and others. Given the choice, they often would rather work out a short sale, taking less on the payoff and avoiding the negative effects of a foreclosure.

According to HUD, short sales account for approximately 50% if all pre-foreclosure arrangements with conventional loans. Since these types of lenders are more familiar with the process, it tends to be the preferable option. The requirements are not as stringent as FHA may be. All parties are involved in the approval, including FNMA, Freddie Mac and PMI.

FHA insured mortgages have additional basic guidelines. They include:

•   Payments must be at least 2 months behind

•   Property must be owner occupied

•   The reason for the default must be unavoidable, involuntary, or beyond the homeowners control

•  The house must appraise for at least 70% of the unpaid principal balance

•  The contract price must be at least 95% of HUD’s appraised value

•  The net amount to the lender after all closing expenses must be at least 87% of HUD’s appraised value

•  There may be a pre-foreclosure sale incentive of $1,000.00

VA guaranteed mortgages do not have set guidelines. A review will be conducted to determine which situation will be more advantageous to them, the short sale or foreclosure.

It could take as much as sixty days for a short sale request to be processed. Be sure to allow for that time period on the contract. And, since you are working with a seller in financial difficulty, a preliminary title search would be recommended. If there are additional liens that will need to be paid at closing, the approval of the short sale could be compromised.

The mortgage servicers will allow real estate commissions to be paid, but often will require that the percentage to be reduced to 5% of the purchase price. And, of course, it is important to remember that the seller will not be receiving any proceeds from the sale as the lender will require that 100% be given to them for the payoff.

The IRS will be advised that a short sale has occurred. There may be additional tax liability for the seller, and they often are not aware of this possibility. In addition, some loan servicers may place a deficiency judgment against them for the unpaid balance. It is important to inquire as to this possibility when pursuing a short sale.

The impact the seller’s credit is lessened by a short sale. The mortgage will show as satisfied, but not completely paid out. A foreclosure is far more damaging.

Coordinating and successfully achieving a short sale can be time consuming and difficult. Having the knowledge to do so will be a valuable asset for any agent.