Do I have to miss payments to do a short sale?

This is one of the most common questions I hear lately. Many homeowners know that if they don't sell their home soon, they won't be able to make the payments anymore so they want to sell before they miss a payment. It makes a lot of sense. The main thing that hurts your credit in a short sale is the missed payments. In fact, recent FHA guidelines state that a borrower is immediately eligible for an FHA insured loan after a short sale if they were current on their mortgage and other installment debts at the time of the short sale. Sounds great! You can remain current on your mortgage payments, do a short sale, and immediately buy a more affordable home. Yes, in theory you could.

Let me share a conversation I had yesterday with IndyMac. The borrowers/sellers I am representing in a short sale wanted to preserve their credit as much as possible. As soon as I listed their home I asked IndyMac if they would consider a short sale if the borrowers were current and they said yes. That's great! I relayed the message and the borrowers made the decision to continue making payments. We had a fair offer within one week that I submitted to IndyMac. When I later called to check on the status I was told that they had received the short sale package and had initiated the short sale but they were still waiting for the investor, Fannie Mae, to initiate the short sale on their end. I called back yesterday to see if it had been done and was told that Fannie Mae will not consider a short sale until the borrower is at least 30 days delinquent. Seriously? Let me see if I understand this. The mostly government owned entity that received billions of TARP dollars to help get us out of this housing mess is essentially telling people to stop paying their mortgage if they want to do a short sale. Just wait, it gets better. When working with most banks, when you submit a short sale offer, the lender will postpone the foreclosure date until the short sale has been either approved or declined. In my experience, Fannie Mae will not. If the short sale cannot be finalized prior to the auction date, Fannie Mae will foreclose -- even if the reason the short sale is not approved is due to delays at Fannie Mae! I'll write another post about the recent announcement that Freddie Mac and Fannie Mae will now participate in the HAFA program but for now, know that the other government backed entity, Freddie Mac, is requiring borrowers to be 60 days late to be eligible for a HAFA short sale.

To answer the question "Do I have to miss payments to do a short sale?" I will say you better check to see if your loan is backed by Fannie Mae or Freddie Mac. If it is, the answer is probably yes. I have heard from a few agents that they were able to get a short sale approved while the borrower was current (and the mortgage was backed by Fannie or Freddie) but it's very rare.