1. How can I get started with the Short Sale process?
Call us today at 949-939-7831 to schedule a confidential appointment where we can evaluate your situation.
2. What is a Short Sale?
A Short Sale occurs when the purchase price is or may be insufficient to enable Seller to pay the costs of sale, which include but are not limited to the Seller’s closing costs and payment in full of all loans or debts secured by deeds of trust on the Property due and owing to one or more Lender(s) and/or other lienholders. The Seller also does not have sufficient liquid assets to pay any deficiencies. The lienholders agree to release or discharge their liens upon payment of an amount less than the amount owed, with or without the Seller being released from any further liability.
3. Who Qualifies for a Short Sale?
In order to qualify for a Short Sale, the Seller must prove to the bank one or more of the following conditions:
- Loss of job, and difficulty in finding new suitable job
- Job Relocation, when equity is deficient
- High medical expenses due to disability, injury or illness in family
- Unable to afford the loan from the beginning
- House needs unexpected major repairs
- Overextended Credit
- Changing Economy
- Adjustment in mortgage payment due to interest rate increase
Incidentally, these are also the most common reasons for a foreclosure.
4. Why Would a Lender Accept a Short Sale?
Why would a Lender accept less than they are owed? Because the alternative is a foreclosure. Just as with the borrower, there are significant consequences to the Lender if they foreclose.
- The legal costs of eviction and repossession,
- Loss of loan payments during the foreclosure process until it is re-sold
- A foreclosed house will need work before it can be resold
- After the foreclosure, the bank has two options: Sell it at the courthouse steps, or try to resell in the market. If they resell in the market, they are penalized by the government by freezing 3-10 times the loan amount so that the Lender cannot lend those funds to another borrower.
5. Do Lenders approve all Short Sales?
6. What if a property needs work, can I still apply for a Short Sale?
Yes. In fact, Lenders are more motivated to do a Short Sale on a property that needs work than on a property that doesn’t. The Lender knows the risk of loss goes up when they foreclose on a property that needs lots of work.
7. What is a Short Sale Packet and What Needs to be in It?
A Short Sale package is used to determine whether a homeowner can afford the property. Most Lenders already have a standard package which they will send to the borrower upon request. The borrower is expected to provide financial information to include income and household expenses.
The Seller must fill out forms with the Listing Agent to be submitted to start the Short Sale process – and submitted with any offer. These forms include:
- The Listing Agreement
- Authorization to Release form (to allow agent to discuss with bank)
- Hardship Letter
- Financial Statement
- Seller Net Sheet (a copy of the HUD form with offer)
- Contract (when offer is accepted)
- Buyer’s Proof of Funds (with offer)
8. What are the Tax Consequences to the Seller of a Short Sale?
Before, the Seller was sometimes required to declare the difference between the loan principal and the amount the bank received as income on their tax forms, and pay tax on it. In November 2007, a law was passed that changed this. Effective January 1, 2008, “Forgiven Mortgage Debt” (the difference between the principal and the amount the bank received) is excluded from taxable income. There are restrictions. In order to qualify for this exclusion, the house must be occupied by the owner as a principal residence (not a summer home, vacation house, rental property, etc.). Investors do not qualify.
9. I have more than one mortgage on my property. Is that a problem?
No. Subordinate Lenders are more flexible than 1st mortgage holders.
What if I have 2 mortgages held by different Lenders?
When you have 2 loans with the same Lender, it is more beneficial to them, as there is no need to negotiate with another Lender.
When the two loans are with different Lenders, the process is a little longer, but the second Lender is the one who has more to lose if they don’t reach a settlement. This is because if the property goes to foreclosure, the first loan is the first one to be paid and the second usually nets nothing.
10. Do I have to be past due on my mortgage to be able to get the benefit of a Short Sale?
No, but it is likely that the Lenders’ guidelines will prevent them from formalizing a Short Sale if the loan is not past due. This means, for them, that the borrower has the means and can continue to pay on the loan each month. Please understand, however, WE ARE NOT RECOMMENDING THAT ANYONE STOP PAYING THEIR LOANS. In the current market conditions, it is possible that a bank would accept a Short Sale, even when the borrower is current.
11. What is a BPO?
A Broker Price Opinion (BPO) is when the Lenders contact their own Broker/Real Estate Agent and pay them to render an option on the condition, value and time on market for the property. This is because many Lenders do not have the knowledge of the market in California, because their offices may be in Texas, for example.
12. If a Lender saves so much money working out a Short Sale arrangement, why do they request so much information and why does it take so long for them to work a file?
The Lender wants to make sure that a borrower is truly having financial problems and is not one of those people who for various reasons just wants to stop paying for the property and the mortgage debt. If the borrower has liquid funds, the Lender will want the borrower to use them in the sales process. The Lender also wants to make sure the borrower is not selling the property to a related party for the sole purpose of locking in a reduced pay off. The bottom line is that the lender is going to manage the transaction with the objective of recovering the most money for the Lender. The time frames involved cover a multi-step negotiation process between the borrower and the Lender with either the Lender or borrower objecting to certain terms and making various counter proposals before coming to an agreement. Third party inspections and BPOs will also need to be done before the negotiations can be formalized in an agreement.
13. What is a hardship letter?
This is a letter that explains the borrower’s current financial circumstances, i.e. which circumstances have changed from when the house was purchased, and why the mortgage payments can no longer be made. These circumstances are what led to a borrower’s inability to make payments and to pay off the loan in full. This letter must be written by the borrower, and be sincere in demonstrating (with documentation) that it is the truth.
14. What types of information does the Lender require the borrower to submit?
Along with the Hardship letter, each Lender will have different forms that we will need to complete. All Lenders generally require various items such as two months of bank statements, pay stubs, past tax returns, W2, etc. Usually each Short Sale package that I submit is over 70 pages long.
15. How long does it take to complete a Short Sale?
The time frame for the Lender to receive and evaluate the Short Sale proposal is about 60 to 90 days from the time the offer and Short Sale Package are received. Buyers need to realize that this is a lengthy process. This is why it is very important to work with a Short Sale Specialist who knows how to manage the transaction. The other agent and the buyer may get cold feet at the end, and the transaction may fall through.
16. Why does the bank accept less than they are due?
They lose less money on a Short Sale. On average, Lenders lose tens of thousands of dollars less on a Short Sale versus a full foreclosure. It is simply in their best interest.
17. Why do lenders prefer to work with experienced agents?
In steeply declining markets, Short Sales are booming. Selling a home for less than the underlying mortgage often provides troubled home owners with their best chance of avoiding foreclosure and ruining their credit. A cottage industry of bankruptcy specialists and other self-described loan mitigators are trawling for clients, but Lenders would often prefer to work with real estate professionals in negotiating Short Sales for clients. Here’s why:
- Agents are licensed by the state.
- Agents adhere to a code of ethics.
- Agents carry errors and omissions insurance.
- An Agent has too much at stake to cut corners. A licensed professional is not likely to commit fraud that could put their entire career at risk.
- An Agent specialized in Short Sales does not need extensive training by the Lender’s loss mitigation department. Many departments simply move the file to the foreclosure stack when they realize the listing agent is not experienced in Short Sales because they have hundreds on their desk and do not have time to train the agents.
18. I owe more than my home is worth. Is a Short Sale my only option to get out of foreclosure?
You have other options, like a Deed in lieu of foreclosure. That is a perfect case to demonstrate to the Lender that if they do not accept a Short Sale, they are going to lose even more money than they are now.
19. Can you guarantee a successful Short Sale?
No. Anyone who says they can guarantee a successful Short Sale is delusional, has never worked a Short Sale, and is not someone you should hire. Our goal is to work out a successful Short Sale with the bank. However, there are a lot of variables that neither we nor any 3rd party negotiator has control over.
The only guarantee is that we will do all that we can to prevent a foreclosure.
20. What if the bank rejects the Short Sale proposal as presented? Am I still obligated to sell the home to the buyer?
No. Under a traditional sale, you could be sued for specific performance if, as the Seller, you did not meet the terms of the contract. However, a Short Sale requires the approval of the contract by the bank. In the scenario where the bank rejects the packet, we would need to correct the items that caused the rejection and re-submit.
21. What’s the difference between a Short Sale and an REO?
A Short Sale occurs prior to the bank foreclosing on a defaulting Seller. Should the Seller or the bank not receive an offer that’s acceptable, the bank will foreclose on the Seller and sell the home at a public auction. Should no one outbid the bank for what is owed, the bank purchases the home back and that property becomes an REO (Real Estate Owned).
22. Is it possible to start a Short Sales process when foreclosure has taken place?
If the homeowner was evicted or the property was sold at auction, a Short Sale is not possible.
23. What are the requirements from the property owner?
Sign a listing agreement with the realtor.
List the property for sale.
Vacate the home following close of escrow.
24. How does the Short Sale process generally work?
There are a few important distinctions between selling your home traditionally and selling your home through a Short Sale.
Your mortgage company is thoroughly involved in the selling process. The bank will review a whole host of documents and will need to agree to a Short Sale proposal. The proposal will consist of your hardship letter, proof of your hardship, a listing agreement, a sale agreement with a buyer, sample HUD-1, a CMA, and other requested documents.
As a result of their involvement, the home will need to be listed for sale “As-Is” with you not making any repairs requested as a result of the inspection. Also, any agreements must be submitted to the bank for approval. This takes time and so as a result, it may be a number of weeks before a Short Sale is approved.
If the home has both a first and second mortgage, both will need to be negotiated independently, which may further delay the process.
All commissions and closing fees are set by the bank upon agreement of the Ahort Sale and as a Seller, you will not receive any proceeds from closing.
Purchasers looking for an opportunity to own a home below market value should look into Short Sales. However, there are a few things you must remember before you make an offer.
Be Patient. Short Sales Take Time!
Among the chief complaints I hear from Buyer’s Agents and Buyers is the amount of time required to get a response to their offer on a Short Sale. This comes from a general lack of understanding of the process that is occurring between the Seller, the bank and their vendors. Here is a summary:
- An offer comes in.
- The Seller signs it.
- The agent compiles the offer with about a hundred pages of other documentation on the Seller and sends it to the bank.
- A file is opened with the bank.
- The file is processed in loss mitigation.
- An appraisal is ordered if one hasn’t been done already.
- BPO data is gathered.
- A negotiator is assigned.
- Negotiator reviews the file.
- Consults with the investor behind the loan.
- Sends a response to the agent.
This entire process can take a few weeks or a few months. Most Loss Mitigation departments are handling tens of thousands of files and your negotiator may be handling 2,000 Short Sales personally.
If the home has a second mortgage, the process will take even longer!
Rarely is the first and second mortgage with the same bank. If if that is the case, the two mortgages may be handled by different negotiators. That means that it could take an additional couple of weeks to get a response from the second mortgage after a response has been received from the first. The banks work on a time line so if the second takes too long or if the listing agent doesn’t communicate properly, the process with the first will have to be restarted all over again.
If the home has multiple leins, it could take even longer.
The listing agent doesn’t know what the bank will accept unless an offer has been received beforehand.
In a normal real estate transaction, a Seller will list a house for sale at a price that is acceptable for them. In a Short Sale, the bank / investor on the actual loan has the final say on the price and they donít share what they will accept with the Seller or their agent until an offer is received. This puts the listing agent in an awkward position and could result in a home being listed for sale below what the bank is willing to accept.
25. Does it cost you anything for a Short Sale?
No, the bank covers all of the fees for the Short Sale including real estate commissions and fees generated by the escrow company and/or 3rd party negotiator.