The Short Sale Process
The short sale process is unlike a traditional sale. It is truly a negotiation with the lender about a transaction that will result in a loss to the lender. The necessary approach is to package the short sale in such a way that the lender views it as a loss-mitigation, or the best scenario for your lender, given the alternatives. It is not an easy process and it will take a significant amount of work by the homeowner-borrower, the agent, the lender, and a patient buyer. Real estate agents don’t necessarily need to be specially trained or certified to handle a short sale, but as with any other transaction, the more training and experience your agent has, the higher the probability of success. Many sellers make the mistake of not qualifying to find an agent who is proficient in short sales.
Many short sales do not get approved or fall through for a variety of reasons. Following is a summary of the step-by-step process typically required to complete a successful short sale, starting with the homeowner-borrower and moving through lender negotiations to the closing.
Deciding on (and Committing to) a Course of Action
The first step in the process is for the homeowner-borrowers to evaluate the options and to decide if they want to pursue loan forbearance, a loan modification, a short sale or to fall victim to a foreclosure. The options all have their impact on your credit, your taxes and your legal rights. We can help guide you through this process, but I recommend that you consult with your tax advisor and attorney. In most situations, a short sale is the prudent choice.
Initial Lender Contact
Lenders will not talk to investors, potential buyers or real estate agents unless they are instructed to do so by the borrower. We will need to get your approval in the form of a third party authorization. We will then contact the lender(s) submit that authorization, and make the first telephone contact with the lender. We will then work with the lender(s) and other lien holders (like a past due HOA obligation or a tax lien) to determine exactly what they will require to initiate the short sale process.
Now is the time that you will need to help by providing the information to justify the short sale of the house. The hardship letter is the cover for the short sale package. It is a lot like the cover letter for a job resume. It must be convincing and complete. The lender(s) must get the clear message that if they don’t approve a short sale, they may be facing a foreclosure or bankruptcy. We can provide you with sample hardship letters, but the best come from your heart and are specific to your situation. You will also need to prepare a thorough and detailed set of documents and financial data to support the claim that a short sale is a good solution for the lender. All lenders have their own requirements, but most have their own Short Sale Application forms. We have access to most of them. In addition lenders will require copies of the most recent mortgage statement(s) and if possible, letter(s) of default specifying loan account numbers and telephone contact numbers for the loss mitigation department. They will also want copies of your most recent tax returns, copies of your two most recent pay check stubs and copies of your most recent bank account statement(s). In almost all cases, the short sale approval process will not even begin without ALL of the information requested by the lenders. It is important to include any and all obligations that will need to be satisfied when completing the sale. It is not uncommon to find tax liens or HOA liens late in the process.
Getting the Property into Contract
We will perform a market analysis of your property, help you decide on a price, help you to best present your property, list the property and market it effectively. Up until the contract process, the marketing of a short sale is much the same as a traditional sale. Once an offer is presented, it is my job to help qualify the potential buyer financially and motivationally, and to prepare the contract in such a way that the transaction is subject to your lender’s approval. Once we accept a contract, we will open a pre-escrow with a Title/Escrow company and instruct the escrow officer to provide the lender(s) with a clear financial picture of the transaction and all of the expense and tax items associated with the sale through a document called a HUD-1. This is one of the keys to a successful short sale. If an expense item is inadvertently left off the HUD-1, the lender will not pay it, so it will be up to you or the buyer to pay this additional expense. Many short sales fall through because of items that were not included in the HUD-1 and none of the parties are willing to pay for them at the last minute. Have your agent explain the HUD-1 to you. If he can’t do it, find an agent who can.
Presenting the Deal to the Lender(s)
The next step is to present the entire package to your lender(s). The lender(s) will assign the sale to professional in-house negotiators who will negotiate the terms of a possible transaction. We will be negotiating with each of the lenders to determine how the loss is split, and whether the price is fair.
This process is extremely time-consuming. Many lenders are so overwhelmed that it takes weeks to even get a deal assigned to a negotiator. Many negotiators are handling hundreds if loans. Negotiators will order appraisals and/or broker price opinions to confirm a fair price for the property. They will then present us with the terms of a short loan payoff. This is where an experienced short sale agent makes all the difference in the world. Many short sales fall through due to inexperience or lack of follow-up by the agent.
Keeping the Buyer in the Deal
The negotiation process varies from lender to lender. Some respond in a few days, others take six months or more. During this time it is not uncommon for the potential buyer to either lose interest or to find another property. A good agent will maintain constant communication with the buyer or his agent, and will also have backup buyers in the loop. It is not uncommon to have a sale approved by a lender, only to find that the buyer has changed his mind or moved on to another property.
Closing the Sale
Once the Lender(s) agree to a set of terms, they issue a short approval and payoff statement. At this point the normal sales process is resumed, inspections are performed by the buyer, the buyer secures his financing and, if all goes well, the sale closes in roughly 30 to 60 days.
I hope that this gives you a better understanding of the short sale process as well as an appreciation for the importance of selecting a realtor with short sale expertise. Please feel free to call me for more information.
Don Farrow, California DRE Broker # 01771241
Short Sales – Frequently Asked Questions
Why not just let the Home Foreclose?
There are a number of reasons why foreclosure should be your last option. First is the damage it will do to your credit. The FICO scoring is an extremely complex and highly guarded proprietary calculation that takes into account many factors in addition to your mortgage resolution (www.FICO.com). Most experts predict that a foreclosure has the worst impact on your credit score, dropping your FICO significantly. A short sale can be reported in a number of ways, but it is typically reported to the agencies as “paid-settled” and sometimes as “paid as agreed”. This will typically lower your score to a far lesser degree. Another serious impact to your FICO is a delinquent payment history. Your drop in FICO will have an impact, not only on your ability to get another mortgage, but it could impact your credit card charges and limits, as well as your rates on a future auto loans. Most individuals have their credit card limits lowered significantly after a foreclosure.
Many employers check your credit as a standard procedure before hiring employees. A private employer may refuse to hire someone based on a prior bankruptcy filing, poor credit or based on a foreclosure.
Typically, most lenders will not allow you to finance another home for three years. VA loans are typically available after only one year. When does this period begin? It begins on the close of escrow on your short sale and on the foreclosure sale date – not the day you walk away from your home.
What is a Deficiency Judgment?
A deficiency judgment is a court order for the borrower to repay the lenders shortage on the transaction, even after losing the property. Every situation is unique, and I would recommend you talk with an attorney, but in most cases lenders do not have the right to pursue a deficiency judgment on all foreclosed loans in California except for “hard money loans”. In the case of short sales in California, SB 951 restricts deficiencies on purchase money first mortgages and SB 458 included junior loans as part of the restrictions. These bills apply to investment properties and second homes as well as to primary residences.
Will I owe capital gains tax on the loan forgiveness?
Prior to January 1, 2010, a short sale seller would be liable for paying tax on the forgiveness of debt in the event of a short sale, even when he took a loss on the transaction. The Mortgage Forgiveness Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief. This provision applies to debt forgiven in calendar years 2007 through 2012. Unless extended, this relief will end this year.
What is Forbearance?
Forbearance is a postponement of loan payments, granted by a lender or creditor, for a temporary period of time. This is done to give the borrower time to make up for overdue payments.
Should I try to get a Forbearance or a Loan Modification rather than a short sale?
It all depends on your situation, but one of the things that you should consider is the nature of your hardship. If you have missed a few payments as a result of a short term hardship, such as an unexpected medical expense or a short term loss of employment and you can prove to your lender that you will be able to catch up in the near future, then forbearance or a repayment plan makes sense. If your hardship is of an intermediate nature – perhaps a decrease in income that you hope to eventually overcome, then a loan modification would be a great approach. Loan modifications typically involve a reduction in the interest rate on the loan, an extension of the length of the term of the loan, a different type of loan or any combination of the three.
Are there Government Programs that can help me?
Yes. HAMP, which stands for Home Affordable Modification Program, was designed to help homeowners modify loans that are guaranteed by Fannie Mae or Freddie Mac. It applies to mortgages of less than $729,750 on primary residences financed before 1/1/09 and is intended to reduce loan payments on your first mortgage (PITI) to 31% of your current gross income. There is a wealth of information available at http://makinghomeaffordable.gov . You can also get free access to a HUD approved counselor either through the website of by calling 1-888-995-HOPE (4673). The program incents and encourages lenders to participate, but loan modification is not mandatory. Only a small percentage of the eligible homeowners have received permanent loan modification to date.
A program under HAMP is HAFA (Home Affordable Foreclosure Alternatives). This program standardizes and expedites the short sale process. HAFA is designed to help those homeowners who don’t qualify for (or don’t wish to continue with) a loan modification through HAMP. If a homeowner has met the basic eligibility requirements of HAMP, but was not granted a loan modification, the lender is required within 30 days to review and evaluate the homeowner for HAFA. HAFA also has guidelines for junior (second mortgage) leinholders. The program protects the borrower from any deficiency judgments and pays the borrower up to $3,000 in relocation assistance.
Why is it important to use an Experienced, Certified Real Estate Agent?
The field of loss mitigation, including modifications, short sales and foreclosures is so much more than selling your home. With a short sale, your agent will not only sell your home, but negotiate your deficiency with your lender(s). You should find an agent who has a thorough understanding of all of the issues, access to the right tools and has the discipline and skills necessary to negotiate on your behalf. I am a Certified Distressed Property Expert (CDPE) a Certified Five Star Short Sale Professionals and a Certified HAFA Specialist. I have been formally trained in Broker Price Opinions, Working with a Distressed Borrower, REO Agent Training and Karras Negotiating Skills. I am certified on the RES.NET and REOTrans/Equator short sale and REO Portals.
Don Farrow, California DRE Broker # 01771241