The foreclosure problems we continue to hear and read about are affecting us all – whether you’re a seller personally involved in a foreclosure situation, or a borrower dealing with more stringent lending guidelines.
Lenders are under increasing pressure to avoid foreclosure and contain losses, but there are limits to what they will do. Short sales have been around for a while, but recently have become more prevalent as a tool to deal with the foreclosure crisis. However, the short sale process is complicated and can be time-consuming, given the volume of requests coming from the marketplace.
In recent months, I’ve had several buyers offer full price on short sale listings only to find out weeks later that the lender never considered short selling the property. Finding a REALTOR® who understands the short sale process, and its value as a sales tool, is critical.
What is a short sale?
The working definition of a Short Sale is: A mortgage default workout procedure in which the lender accepts less than the full balance on the loan and the borrower works with the lender to sell the property quickly.
Not a sure thing
To determine if a seller qualifies to take a short sale on their property, most lenders require certain information. This usually includes:
- The seller proving they do not have the means to repay the mortgage. This may include: pay stubs, bank statements, tax returns, (non) employment verification, evidence of divorce proceedings, doctor or hospital receipts, proof the seller must move to another location, etc.
- The seller proving their change in ability to pay is the result of new circumstances and not something the seller concealed from the lender when they originally applied for the loan (concealment of these application facts could be considered mortgage fraud).
- An appraisal or Brokers Price Opinion (BPO) to verify the value of the property has either decreased, the offer price is the maximum price obtainable and/or the property listing has exceeded average days on market.
- Verification that the seller has met with a HUD-approved Counselor (see below) and other options (i.e., refinancing, loan modifications, etc.) are not viable.
- Proof of repairs needed with qualified estimates for repair costs.
- A preliminary HUD-1 with all estimated costs, including required restrictions on REALTOR® commission and title agency fees paid from the sale.
Procedurally, short sales have no set guidelines or guarantees. It takes the combined effort of the seller and the agent to find out as much as possible about: (1) the lender's requirements, (2) who to submit the offer to, (3) an estimated wait time, (4) compensation to agents, (5) any closing costs or other considerations. Once these issues are addressed, the likelihood that a short sale can be completed grows exponentially.
If the seller’s request is accepted, the lender will give a conditional approval to allow a short sale. This approval doesn't usually agree to a price, it simply confirms the lender will consider lower-than-mortgage-balance offers.
Here are some other helpful information to keep in mind:
- There may be special requirements for submitting offers to the lender, and a few lenders require specific clauses and/or disclosures to be included with the Purchase and Sale Contract. Don't rely on a lender representative's verbal statements regarding the terms of the short sale - - get their terms and responses IN WRITING. This can help cut down on vague stall tactics such as "just start sending offers, then we’ll respond."
- The Private Mortgage Insurer (PMI) is an ally to the seller in these circumstances because the PMI doesn’t have to pay unless the property is foreclosed upon. On the flip side, the lender typically won't settle for a short sale that is substantially below what the lender would net from an auction and PMI payout.
- If there is more than one mortgage, ALL lien holders MUST agree to the sale.
- The lender won't say how low they will go to sell the property, but you may be able to search online (or investigate with your preferred loan processors) to get an idea of the range and average maximum discount a specific lender has traditionally accepted.
The seller may still owe the IRS
At present, the seller will likely owe the IRS some taxes on the amount of any forgiven debt, or the lender may require the seller to sign for a new loan to pay back the shortfall. Even if the lender approves the short sale without a loan payback, that lender may impose “requirements” that attempt to pressure the seller into a loan for repayment, pressure the buyers to pay more cash, and/or pressure the REALTORS® to forego or reduce their commissions. However, changes have been proposed at the federal level that may diminish or even eliminate the shortfall debt – without further cost to the buyer, seller or agents – depending on the circumstances.
Help is available
The Department of Housing and Urban Development (HUD) has Housing Counselors who offer FREE advice to homeowners and help them understand the law, review refinance or sale options, and organize the qualification process. Best of all, these Counselors will also assist in negotiations with the lender. The short sale process will likely go more smoothly and quickly with their help.
You can find contact information for HUD approved Counselors located near you at: www.hud.gov or call 800-569-4287.
Courtesy of Jon White, GRI, RECS, Broker-Owner
White Gate Realty www.WhiteGateRealtyTeam.com
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