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Defaulting on Your Mortgage Payments Is NOT Required for a Short Sale

Whether you live here in Orlando FL — where the real estate market is a bad as it can get, house prices are undervalued 25% or more, and the market looks like it won’t recover for years to come — you do not have to default on your mortgage in order to qualify for a Short Sale.

You may have read articles on the Internet or received advice from well-meaning friends that to be approved for a Short Sale, you must first prove your hardship by defaulting on your mortgage loan.

This may have been true once for some banks, but not anymore.

While defaulting on your mortgage may support your already legitimate hardship claim, it isn’t a requirement. The fact that you are currently undergoing a hardship that will force you — very soon — to default on your mortgage loan unless you can first sell your house is the most important requirement.

If you want to find out your lender’s policy, call and ask. However, if the first answer you receive advises that you must first stop making payments to qualify for a Short Sale, ask to speak to a supervisor. If the supervisor advises the same thing, ask to speak to a manager.

Once you have an answer you feel confident with, make a decision based on your own circumstances. Understand first that defaulting on your mortgage loan can have more serious penalties than selling your house as a Short Sale.

Only if you absolutely cannot keep up with the monthly obligation should you stop making your mortgage payments.

If you lost your job, then you can’t keep up.
If you moved to another city and need to pay for housing there, then you probably can’t keep up.
If you leased your house but the rent falls short of monthly cash flow, then you can’t keep up.
If you’re borrowing from retirement savings, then you can’t keep up.
If you’re racking up credit card balances and ‘loan shark’ interest rates, then you can’t keep up.

* * * * *

JUDY CHAPMAN | Live the life you dream

Residential Sales ∙ Luxury Sales ∙ Short Sales

Koenig & Strey | 1925 Cherry Lane | Northbrook, IL 60062

Judy@ChgoNorthShore.com | Office: 847.749.3811

Up until a year ago, I sold real estate in Orlando FL, explaining why you’ll see many, many posts related to the Orlando real estate market. Now I’m back in ‘Sweet Home Chicago’, selling real estate in the North Shore and West of North Shore Suburbs.

If you’re interested in relocating to Florida, contact me for recommendations of some very fine Realtors^® all over the state. I can also refer you to some of the hardest working Short Sale real estate agents throughout the country.

Posted by Judy Chapman on 12/29/2009 12:46 PM

Comments (87)

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87 Comments on Defaulting on Your Mortgage Payments Is NOT Required for a Short Sale

DEC

2009

I just got off the phone with a homeowner in CA transferred to Virginia. His mortgage company, BofA told him that they would consider a short sale when he was 3 months in arrears.

Thanks a lot BofA.

I'm still hearing from lots of clients that they've got no choice but to stop paying their mortgages. Short sales just don't seem to be the answer anymore ... at least in our CA markets.

Judy: This is great advice. There is so much false information out there. Great clarification here!

Judy, this is good advice but many banks are still requiring a homeowner to be in default before they consider a short sale. As long as the money keeps showing up, the bank has no incentive to do the deal, even if default is imminent. It puts homeowners in a terrible predicament, and your advice is wise. Banks I deal with just aren't willing to work on a short sale when the payments are still coming in from 'somewhere'.

Interesting, I had no clue that you didnt have to be behind. Thanks for the info.

Great post Judy! I am closing two escrows next week where the homeowner was current and we got the short sale approved.

I think the key is "the fact that you are currently undergoing a hardship that will force you — very soon — to default on your mortgage loan." [Emphasis added]. We made sure that the homeowner highlighted this fact to the lender VERY CLEARLY in the hardship letter.

Judy, this is another reason for homeowners who are facing financial hardship to seek professional advice as soon as they recognize the problem.

It does seem like the Banks are more willing to be serious negoiators when an owner falls behind !

Even if you aren't behind odds are very high that your credit will get damaged pretty significantly if you do a short sale. Maybe not as bad as a delinquent short sale.

Do you know which lenders are allowing non-delinquents to short sale?

Seems to me this changes with the wind. First you had to be in default, then not and now seems to depend on the bank. How we are ever supposed to keep up I do not know.

Judy, A lot of mixed messages out there. I think each homeowner must do their due diligence and find out what their lender's policy is and make sure what they are being told is true.

Well, it looks as though the more things change, the more things change, for the worse.

After taking heed of Lenn's remark, I did some research.

According to Elizabeth Weintraub's blog, Fannie Mae changed policy back around August. "Fannie Mae is now rejecting short sales for sellers who are current on their payments. Flat out rejecting them."

For the past few months, I've been working short sales with Freddie Mac or non-Fannie/Freddie loans through Wells, Wachovia (pre-Wells switch), Suntrust, and Countrywide (pre-Bank of America). In one case, absolutely no delinquency. In another, 30-59 days delinquency but no default. In another, the borrower just couldn't keep up anymore and has had foreclosure papers filed (still waiting for the negotiator approval on this one after 5 months).

As usual, it seems we have a bunch of idiots minding the store, with the consumer finding themselves at the 'short sale' end of of stick.

It'll be interesting to hear other short sale agents' experiences.

I think this information is very helpful. We hear all kinds of different answers. When I saw your headline, I thought to myself that it depends on your lender, and now your information suggests it depends upon who you speak to with your lender. Go to the top and get the straight answer. Very good.

Great information & good advice! Being pro-active on a short sale will save a lot of headache & stress to the homeowners.

I understand that as Realtors, we cannot tell them to default on their payments, just advise them to contact their bank.

Hi Judy, Thanks so much for such a well written and thoughtful piece. Like many, I understood that an owner must have defaulted on payments. Happy 2010 to you !

Another interesting discussion/situation can be found over on Short Sale Superstars.

BTW, anyone can join, so if you haven't, DO!

Great info Judy, it seems that each bank is different and each person that you speak with also has different guidelines. Makes for a tough situation.

It's a jungle out there for homeowners trying to get the true scoop on what's what these days for their circumstances.

Tons of conflicting info leaving sellers and buyers alike quite often in the dark. It seems like it's stressful enough for families trying to honestly cope and deal w/the situation who have lost their jobs and can no longer make mortgage payments, have sick kids and/or family members without any medical insurance without the alleged remedy making matters worse!

I think it's disgraceful how many lending institutions handle their short sales (oxymoron) in many, many cases with total disregard for the human lives involved. No reflection on the lending officers who do a great job for their clients but are often stuck with the rulings of their Institution. It seems that you can have 3-6 Offers that take months, months and more months to get answers to and when you finally do in many cases the buyers have given up and walked (can't say I blame them.) It just doesn't make any sense although I have to believe the lending institutions have a reason for this behavior and if so it can't be good for the buyers/sellers going through it, and all the time wasted by the parties trying to facilitate a sale.

Robin had one short sale where it was thought the bank had agreed to an acceptable price which was Offered only to have it come back with the bank's mind changed and they now wanted something like $20K more.

Hopefully the workings of these will get better defined and organized for all in 2010.

Sue of Robin and Sue

Judy, I have several short sales in the works right now where the sellers are current on payments. And I just closed 2 that were the same way. Personally I don't listen to the banks when they say the seller must be behind on payments. Find a buyer and submit the deal. They'll either apporve it or they won't. My experience is that they will IF the price is right.

Judy, it's pitiful that so many homeowners are getting put in the bind of, damned if you do and damned if you don't. You give a very good tip, keep asking questions until you get an answer you're comfortable with. It isn't a simple process but in many cases it's possible to successfully get to the other side.

Judy- YOu are correct. You have to do what is best for your client which means you try first, then if the answer comes back no, you then go to plan B. We had Freddie turn down a short sale offer because the owners were current. They went in arrears and we by then got an offer 50K less! Than original buyer and offer! Go figure! But then we did another Freddie one where the owners were current.

It does not depend on their lender who is a servicer. The homeowner needs to find out who owns their note. Once they know who the investor is and give that info to you- then you can find out for sure what that particular note owner's policy is. Even it is a policy though- those are just policies. The servicers are afraid of doing anything against their PAS agreements with the investors.

Fannie mae not doing short sales unless the homeowner is behind is what they say, but we have closed fannie owned loans without them being behind.

There are always circumstances, such as an employer who will not allow their employees to go late on payments or they will lose their security clearances, ie: certain military, police, etc type of jobs. In those, we fight all the way to the congressmen to get the deal done if we have to.

Now, will all NON Freddie and Fannie investors who opt into the new HAFA program by the end of this year and that takes effect on April 5th- the homeowner is not required to be delinquent only in danger of becoming late for the reasons you stated in your post. Katerina

I just posted some of the new guidelines on my outside blog. If you default you can not get another FHA mortgage for 3 years. But, you can submit them if you are current. The guidelines change all the time so as agents we must stay on top of them.

Judy, great post - like some said there are still a few who are selling the 'miss a couple payments before we will consider it' line. Sad indeed.

Policies come and policies go, but ultimately we as agents must look out for the best interests of our clients and the best possible outcome.

It is crazy that there is such a lack of consistancy amongst the banks out there. Typically in my experience here in Phoenix, with most lenders, we have found that they have to be behind at least 2-3 months in payments before banks will consider working out a short sale. There have been a few circumstances, however, when the owner has not had to be behind at all.

Thanks for the updates on short sales and I hope that we see more willingness from lenders to agree to short sales before owners default.

This is one area where what happened yesterday is not good today, you have to keep up with all the changes and shifts in the market

I have not seen any short sales that did not involve the seller missing any payments. I wish it were that easy.

Judy, I have not had the chance to experience this, however, I know that the banks are loosening their standards a bit. The coming year sure is gonna be an interesting one, what with all the REOs and short sales, and new guidelines, and new FHA regs, etc, etc, etc.

Great advice Judy! Short sales are such a tricky bag - the rules seem to be changing all the time!

None of the major banks will entertain a short unless you are behind. Do you have a list of lenders that have approved shorts with out being behind?

Each day brings a new hiccup in this real estate industry we find ourselves in. I have had more success with people not in default than in default. There are many reasons why someone finds themselves in short sale status, it is a market condition. Someone who has to relocate due to a job relocation who owns a home in a declining market which they purchased in the recent past is going to be in a short sale situation yet these people need to find suitable housing somewhere else and need a new mortgage, we seemed to be able to work things out with good buyers in bad markets and got them preapproved for their new homes too dealing with the same lender, it was team work. I also find it easier to deal with a local bank who may know me or I can feel comfortable calling their mortgage department directly, I see alot of buyers going to their local lender vs a huge machine.

Great information Judy. Most lenders unfortunately will not consider a short sale if the homeowner is current. It's great to see others who have been sucessful getting a short sale approved without the homeowner getting behind on their payments. I heard a couple weeks ago that BOA actually recommended a short sale to a soldier who was current on his payment.

I hope more banks will begin to follow this. It's good for the banks and for the borrowers.

DEC

2009

Nope! They don't have to let it get that far! They can get it on the market and start finding a buyer before it hits their credit. There is a lot of change going on in the short sale arena now. People may not get hit as hard as they did in the past. They just need to be proactive and it can work out pretty well.

I agree with Jessica on this one!! I am seeing some major inconsistencies among the lender community!! Thanks for sharing!!

Being a stickler for detail I would prefer that the headline read to the effect that default in payments MAY not be necessary. Lender's policy vary and many still have this requirement. So while some lenders are bending on this, a statement that defaulting on payments IS NOT required is actually false.

Still it is important to ask for the policy. You might get a pleasant surprise.

It's most important to get that answers first. In one case we went to the bank and they would not talk because the property was not in default, even though the mortgage payments were being paid by the parents. When we went back 3 months later in default, the bank started a conversation. First thing they wanted the people to do was to take a note for the deficiency that would result from the sale. Second they wanted the realtors to take a cut in commission. So better than anything, find the decision maker at the bank. No two situations are the same.

Some banks actually allow for a larger relocation allowance if they remain current

I have closed 2 loans for buyers who SOLD their current primary residence via SHORT SALES, & then qualified to buy a new home with us ( FREEDOM MORTGAGE ). As our underwriting Dept Manager told us, " it is none of our business nor concern if the other lender decides to take a lower amount for the payoff of the old loan. All we care about is that they have made all payments on time. If there is a deficiency balance, then we need to include the payment of same in the new DTI calculation & ensure they qualify."

In one case there was a $5k deficiency on the 2nd mortgage, which the buyers got a gift for & paid at closing of the short sale, which we documented.

Both cases, the seller/buyer made all payments on time, & we had to document that as well.

This can be done, don't listen to blanket advice, it is case by case right now.

Good luck!

I am watching one BofA deal just approved where they are current. The hardship made it clear that they are not going to be able to keep that up for long.

We are having good luck with getting things approved right now, hopefully that will keep on going.

I too have had banks refuse to entertain a short sale until the home owner was multiple payments in arrears.

It appears that each bank has rules which are changing by the month. One blanket rule does not each loan fit. Persistance and continuing to figure out a solution when one answer does not work will make the difference I believe. Encouraging people to press onward regardless of what friends or other professionals understand as 'policy' is KEY!

In general, you are right. But, there is one exception that requires delinquency. If your loan is owned by Fannie Mae, and the loan is part of a Mortgage Backed Securities Pool, part of the agreement for that pool is that they will not release the loan from the pool to allow a short sale unless you are behind on your payments. In all other cases, you should be able to be current on your loan, like you say, and do a short sale. Some banks may say they require delinquency to show hardship, but if you press the issue they will do a short sale without it.

If you want more information on short sales, go to www.CreateAShortSale.com for a blog that is an encyclopedia of information. Or, you can buy the book, Create A Short Sale, Your Guide Through The Short Sale Maze by going to www.BuyShortSaleBook.com

Thank you for your article.

Tim Burrell tim@TimBurrell.com

This all goes back to a comment by Katerina. Banks are servicers (they collect the payments) and do not have exclusive authority to modify mortgages. Someone said to see who the note holder is, I think they meant controller of the note (Fannie, Freddie, Ginnie Mae etc..) as the note was destroyed when tranfered to one of these entities due to the fact it was cut up into shares and placed into different pools. A feeble attempt to avoid problems associated with high risk. Uh didn't work.

The moral of the story is try what you can and hope for the best.

Someone forgot to tell IndyMac Bank the rules of HAMP. I have seen their letter to a client saying they do not qualify because they are not late or behind in their mortgage payments. What a shame!

Judy, The best understanding I have about ALL THE FACTS concerning Short Sales at this time is: It may be true,but it's not necessarily so. lol Here's to a wonderful New Year!

Steve

Good to know. Every short sale I've ever done required the sellers to be delinquent in payments, though.

To say the market is undervalued by any amount is disingenuous at best, and borderline unethical in my professional opinion. A house is only worth what someone is willing to pay for it. If a house sold for $100k 2 years ago and you can only find someone willing to pay $75k now, it doesn't mean the house is undervalued by 25%. It is only worth $75k in THIS market.

How many short sales have you closed? You are right that defaulting on a mortgage is not a requirement to short sale. But, have you personally ever closed a short sale while the seller was current? In the slim odds that you have I'd love to hear the terms you negotiated for the seller. I'd guess that they walked away paying a seller contribution and/or a promissory note.Not to mention still being broke rather than having 6 months of reserves in the bank. When someone is financially distressed what do you think is more important. Credit that's just bad rather than horrible (can't obtain a nee loan for 2 years regardless) or 6 months reserves in the bank. When they have reserves they shouldn't need credit. That's what got them into the mess in the first place, debt. You see, the leverage in negotiating short sales is created by the banks desire to avoid foreclosure. When the loan is current there is no leverage. I Have been through this many times. As a licensed broker in CA I would NEVER advise someone to stop making payments. But, I can share what the short sale process consists of and how they will most likely be drug out through a very lengthy short sale (why would the bank want to close if they are collecting payments) and most likely end up with poor terms, a seller contribution, or promissory note. If you are going to negotiate short sales that are not in default for a living, you will most likely have to short sale your own house. If you stay current on that short sale I'll be suprised.

You are right Judy,

Even though most banks, continue to tell their clients that they need to have missed at least 3 payments, before they get approved for short sale. I just had one approved after one month of missing payment. In other word it isn't the norm any more to default on your payment to get approve for short sale.

Thanks for bringing this up.

Rea Wilke

Re/Max Pinnacle

http://www.reawilke.com/

I have found that if the sellers have a true hardship....documentable hardship, then they will consider a short sale without the sellers being late. But if someone just wants out and has no equity, then they have told us the sellers need to be behind in their payments (seems they needed proof that the sellers would not make payments). Very odd!!!

In April of 2007 before short sales became prevalent I had the opportunity to help a couple short sale their home. It was interesting, I had them stay current and worked up a time table showing when they would default to the month. The short sale negotiator with my clients bank was astute enough to realize their dilemma and authorized the sale. In today's market using the same technique I find banks unwilling to even talk with me unless the client is behind on payments. Although I know from past experience that selling a house short without my client being in arrears on payments is doable I question why banks are forcing the defaults? Perhaps the experience level of negotiators just isn't there, or maybe the banks are just overloaded with foreclosures and short sales. Anyway you want to look at it, just as Realtors have a learning curve in this market so do banks. Most banks do not accept short sales just because you ask them to, even with compelling evidence that their borrower will fail to make payments soon. Do you think MI plays a role in this decision making?

Here's an interesting case: Countrywide bank holds the note; 630k short sale price per contract 535k

Countrywide refuses to settle after 5months and forecloses. 4months later this asset? comes back as an REO at 404k....Is there any wonder why banks are failing. I have case after case of the same type, the hardships are real, the agents involved are experienced.

So here comes the President and his federal Calvary to save these idiots. (Lets bail them out we can't let them fail) Who's in charge of the banking regulations? Do you think the situation is getting better?

We close a lot of short sales and we have had recent short sales that required the owners to be late on payments.

The first question I always get from folks in trouble is, "Should we stop making payments?"

I always tell them that I can't advise them one way or another, but that if they can keep up on payments without damaging themselves elsewhere, it's would ultimately be less damaging to their credit than to default.

On one of my recent short sales, the sellers did not miss one payment. Their bank approved fast and did not attach any deficiency stipulation or promissory note. They got out of a bad situation with hardly an eyelash out of place. I was very happy for them.

Tomorrow, I will close another SS where the seller has missed only one recent payment, and therefore is not in default. In fact, he CAN'T default because it would threaten the security clearance on his current job.

I've also had short sales close where the sellers were current on payments, even one like the one referenced here where the seller couldnt miss a payment due to his high clearance job. However, to say that it is never required that a homeowner be late on payments to have their short sale approved is simply untrue. We have been we must be late as recently as this month. Every lender is different.

As with almost anything relating to short sale properties the lender will have their own set of rules. So my advice is to quit guessing and go to the horse' mouth and find out what is required to get it done. Then you can advise your clients with confidence.

I do not think these banks know what they are doing (or maybe they do). I have heard stories of banks refusing to work with someone because they are current then refusing to work with them because they are behind.

Judy, I read about Short sale advice everyday, and many times the public is told you have to stop paying before you get any offer of relief...I'm glad you put this misnomer in to true context.

Judy,

Thanks for this advice.... I had WRONG info!

I too have had clients who had to be late on their mortgages before the bank would consider even refinancing for them. The husband is a truck driver, hit hard with this market downturn but they were still making their payments. They had to miss three payments before the bank would deal with them. So, they kept the payments in the bank and missed the three payments. They are now refinanced and still living in the home.

its more like sometimes you do not have to default ,,, it really is up to the banks and they really do have lots of room to do what they want the govt really did a great job on setting them up ,,,,,we bailed them out and left them with little to no strings on that money

We have done short sales this way, especially when military is involved.

Judy, This has been going on for a long time. It depepnds ln the institution, the insurer, and most importantly the investor(s) that own the paper. I currently advise my Agents that work for me to work short sales only from the listing side, as we typically go through multiple buyers before closing. The buyers who want a "deal" are far better suited by finding a bank owned property or a seller with the ability to sell outright than to go into the short sale morass. When they are educated as to the process that buyers have to go through, and the percentages of actually closing succesfully, the short sale prices do not look so attractive to them.

Just my .02 worth!

Michael Curtis, Principal Broker

Exit realty Professionals

Portland, Oregon (Go Ducks!)

Thanks for the article!

In my experience, I have done hundred's of "Shortsales: and none of the lenders including BOA, Chase... have advised the homeowner or investor they have to be late. Also, remember the lender doesn't make the decision to accept or deny a "Shortsale the "Investor or MI company does. We all have to remember that the homeowner or investor made a commitment to the lender " promise to pay" and they don't have to consider a "Shortsale" regardless of the circumstance. Our duty is to do what is best for our clients. We can't promise to get the "Shortsale" approved, but we can advise them of their options, and tell them we'll do the best we can.

Let's go and help some struggling homeowners!

Sincerely,

Cindy Keil Realtor CDPE,SFR,FIS

Licensed in Ohio and Utah

I had a client who I was working on an approval who was struggling to keep the mortgage payments with the lender saying they were working towards an approval....when it came down to the wire we were told that the lender was ok with everything, however, the investor who owned the loan would not allow the lender to sell off a "good loan" and ultimately refused to allow the short sale. So after struggling just to make the payments, the sellers ended up having to stop making payments, ruining his credit and delaying the short sale process by 3 extra months while they defaulted on the loan, before they could get the approval they needed to sell.

It's too bad that you can't truly get help from banks like B of A or Chase until you are actually close to foreclosure sale date. I have files now that will evidence the fact that they don't help while borrowers are current.

Thanks to everyone for adding more info to this story. It's really important to know what's happen at all points of the compass and from others' experiences.

I handle short sales with the premise that if sellers have a legitimate hardship that can be proven with unemployment checks, tax returns, financial statements, hardship letters, bank statements, and the like, they shouldn't have to prove their claim by skipping 3 payments in a row.

On the one hand, homeowners are berated for making the 'strategic' short sale or foreclosure decision. On the other hand, homeowners who are just trying to hold it together and do the right thing by honoring their obligation insofar as they are capable ... they're told to make it 'look good'.

Doesn't make sense, does it?

I have a client who was told by her lawyer that her lender Indymac, would not EVEN look at a loan modification unless she was behind in her payments. A notice of default was filed while the lawyer was supposedly "trying" to get the modification and then a few days before the trustee sale, she had to file a bk to halt the foreclosure sale. Never mind that she has no other debts or credit cards. The bk was merely a legal maneuver to prevent the foreclosure. What a mess ... what expense. So now she has sold the property and can't close until the bk is discharged or dismissed.

So she had to sell her property at a super low price and is in a catch 22 over the bk. If she cancels it, the lender could foreclose and take the property and escrow won't let her close with the bk still in place. So now she will end up with a bk on her record for ten years when she has NO debt and over $50,000 in equity in her home.

Connie Winstead, Realtor

San Luis Obispo County, CA

If a person is late, but paying, they typically are put in a higher risk catagory at the lender, but can keep it off their credit report. Together with a very well documented hardship case showing eminent default, their chances of short sale approval should be ok. I think some of the contrversy about what the banks are & are not doing has a lot to do with people talking to the wrong dept. at the lenders & not presenting their cases in the right way. The banks really don't care about helping people, they are a business, & they are concerned with their bottom line. If an owner can show the bank that their net is going to be higher on the short sale than on a foreclosure, they will have a good chance of completing the short sale. If we can educate ourselves about how to help people do that, we will be able to help people avoid foreclosure, assuming that is their best option.

By the way, has anyone put together any data on the success rate of short sales that are vacant vs. ones where the owners are still living in the house? I think that would be interesting to see if anyone has put anything like that together.

Good luck everyone & happy New Year.

Hi Judy,

The first thing I tell my clients who are in short sale is to stop paying on their mortgage payments. Usually, these clients have already not made any payments for the past four months. It's usually the case they wait to figure things out or are in denial then call me for help.

There are several reasons I tell a client to stop paying if I catch them early enough and they have not defaulted on their loan(s).

1. The bank won't even negotiate with you when you are paying on time.
2. The payments you make will be lost and you will need that money to find another place to live.
3. Stop paying your HOA fee and property tax. The bank will cover those fees when we close.
4. Your credit is going to get dinged-up so don't even bother with any more money other than paying for utilities and your other debts (car, credit card, etc...)

Wishing you the best in the New Year!

Richard Johnston
Sherman Oaks Homes
RE/MAX Grand Central
818-730-4128

I am working with a seller now whose mortgage company (Homecomings Financial) told him they would not talk short sale or renegotiating his loan until he was 2 months in arrears.

This is such important information, relevant and actually I talked today with a client about this. You are right on about the "requirement" and it seems doing the responsible thing is not rewarded, but it may help your credit and your integrity about doing the best you can. I am going to reblog this in my localism..as it's pertinent for us here in California too. Thanks for bringing it up.

The decision to default on mortgage payments should only be done in connection with advise from an attorney. I would hate for anyone reading this blog to say "well Judy said that if x, y or z, it was ok to default."

The Federal Government is providing incentives to lenders to approve short sales - more financial incentives than if the lender were to modify or offer forebearance. Each lender obviously has its own criteria for approving a short sale, but default and the risk of pre-foreclosure seems to be a universal theme with most lenders.

The banks I have dealt with say that there must be missed payments. That could be different in other areas of the country or for other banks. To play devil's advocate, the banks do need some concrete proof that they sellers cannot payback the loan. We think of the banks as a foreign entity, but remember, in the end, their owners are stockholders, that means eventually, people. So when a lender loses, a lot of us lose. Some through stock losses and others through higher fees or more interest paid on other loans.

Unless laws say otherwise, since the banks are basically giving away a lot of their money, they can set the rules for a short sale. If you jump through these hoops and prove to us that it is unlikely we will ever see this money from you, THEN we will do a short sale.I suppose the requirement could be that your boyfriend has to wear your prom dress and ride a bike down Main Street. When you ask them to forgive tens or hundreds of thousands of dollars, they are going to have some requirements. As far as I know, the Fed has not said they cannot demand that you be behind a certain number of months in payments.

Thank you for the info! This is contrary to what I've heard until now - and this is definitely good to know.

DEC

2009

I have closed short sales where the seller was current with payments. A solid hardship letter and paperwork to back it up (ex: savings account shows withdrawals each month to cover mortgage payment and now savings is gone) will satisfy most (not all) banks requirements for a short sale. Thanks for the post - I hear from people all the time that are behind on payments because whoever they talked to at the bank told them they had to be in order to do a short sale.

JAN

2010

Thank you for this post. It's so important we keep each other updated as we all muddle through these short sales. Even if a bank requires the seller be behind, they could be fewer months behind if they kept up with payments at least until an offer was received. And that would be better for them, right?

Great news Judy, thanks!

JAN

2010

One principal reason for short sales is supposed to be the reduced impact on FICO scores of short sale vs foreclosure. However, months of 90 day mortgage lates makes that reduced affect on FICO much less likely. As far as short sales are concerned there are 2 things every agent should know - there are no guarantees about anything associated with short sales and it's better to be the "source of the source" rather than advertsing oneself as the expert.

JAN

2010

It could be appropriate for the bank to require the borrower to default before allowing the short sale.

Hi Judy,

There is an agent in my office who is listing a short sale that is way overpriced but the bank won't accept anything less. The owner keeps making the payments. At this rate her short sale could go on forever. It won't foreclose because she is making the payments but at the same time what motivation does the bank have to accept the short sale since their is no loss to them right now.

I'd like to see it where the owners don't have to be behind to be considered as by expecting that the banks are encouraging total failure for the sellers.

It seems to be that loan modifications will not be considered unless the seller is behind on payments as well which is totally wrong.

Thanks so much for your post!

JAN

2010

Just a note...The term Undervalued implies that the properties are worth more than they are selling for. In Michigan we are down 40% to 50% from peak prices, that doen not mean they are undervalued.

In most of the short sale transactions I've handled, the homeowners were already in default. In a recent transaction, the homeowner was continuing to make payments, albeit with difficulty, while waiting to be approved for a short sale. When calling to check on the status of the file, I was told that they would not consider a short sale until the homeowner was 30 days in arrears. It's sad when the homeowner is actually trying to honor their obligation and being informed they need to do otherwise in order to get the file processed.

I hope that lenders stop making this a criteria for short sale consideration.

JAN

2010

Hi Judy, Policies seem to differ from Bank to Bank. It would be the humane thing to ease suffering when default is inevitable. My unscientific research indicates that Banks fare better with a short sale than a foreclosure.

JAN

2010

I have spoken to many homeowners who intentionally missed mortgage payments just so they would be considered for a short sale.

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Judy Chapman

Northbrook, IL

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Koenig & Strey Real Living

Address: 1925 Cherry Lane, Northbrook, IL, 60062

Office Phone: (847) 272-0330

Cell Phone: (847) 859-9197

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