A short sale is an agreement between a lender and a borrower to settle for less than is what owed on the loan. Obviously, many things need to be factored in before this decision can be made. If you are 3 months or more behind in your mortgage payments, chances are the company that services your loan, your lender, (i.e. Chase, Wells Fargo, Countrywide) has begun foreclosure proceedings. This doesn't mean that there aren't still solutions for the homeowner. But lately, after exploring all the other options (and I'll get to those in a later post), many homeowners have decided to attempt a short sale. I say attempt because not every situation is set up for a successful short sale to be completed. Your lender is going to want to see that you/your family are experiencing a hardship of some sort that is not something that you will able to remedy before a Sheriff Sale is scheduled.
Before the lender will even look at an offer that is for an amount lower than your payoff, they require a 'short sale package' to be submitted. The items to be included can very a bit from lender to lender, but in general, most banks will review the same set of documents.
Here is what you'll need:
1) A hardship letter - this is a one page document written by the homeowner explaining exactly what brought them into their current situation (i.e. divorce, job loss, death of a spouse, rate adjustment) that no longer allows them to make their payments as scheduled. Be specific, and honest. The person assigned to making the decision about your loan WILL read this in it's entirety. If it doesn't match up with the supporting documentation, that's the easiest way to have your short sale request denied. I used to have my clients hand-write these for a more personal touch, but after talking with a bank's loss mitigation manager, he suggested they be typed. It's just easier for them to read after faxing...
2) Tax Returns - Many people make the mistake of just sending in their most recent W2. While that may suffice on occasion, they would really like a better overall picture of your financial situation. Normally no more that the first 5 pages or so will work.
3) Bank Statements - You'll need to get copies of your bank statments for the last 2 months. This one is pretty easy. They want to see exactly how much money you have.
4) Paystubs - The homeowner will need to submit paystubs from their last two pay periods.
5) Income/Expense Statement - If you're requesting a short sale, you need to show the lender exactly what is coming in and going out every month. For a better chance to be accepted, include every expense that you currently have. (If you're working with me, I'll provide a sheet with a professionally itemized template to work off of.) Be sure to include insurance, car payments, utilites, credit cards, mortgage payments...everything. Again, the person assigned to your file WILL review this, and it needs to match up with your bank statment.
If you're an agent, you also need to include the following:
6) Purchase and Sale contract
7) Listing agreement
8 ) MLS Sheet showing current Days on market (save your COMPs/relevant market data for negotiating leverage later on if necessary)
9) Authorization to Release form - this allows you to speak directly with the lender on behalf of your client. This should be attained at your initial consultation. It must contain the homeowner's signature, SSN, and loan #. Please be aware that if you're working with certain banks, they can expire from time to time, so be sure to ask the bank rep if that is the case.
10) A preliminary HUD-1, or at the very least, a net sheet.
Now that we have the bulk of the specifics out of the way, let's review a few other factors that go into whether or not your short sale request is accepted. Firstly, and this is something that I've only recently been made aware of, but makes a perfect sense, does the loan have PMI (Private Mortgage Insurance)? This will determine whether or not the bank will be recieving any compensation from an insurer of the loan. Most often, it is around 20%-30% of the total debt owed to the bank. So if the payoff (including principle balance, taxes, insurance, PBO fees, and attorney fees) is $200,000, and the insurance is for 30%, the bank will be getting a check back from the PMI company for $60,000. Think that makes a difference in their answer? You bet! Unfortunately, many of the loans written in the last few years were done without having the owner pay PMI, by using 80/20 products.
Besides PMI, there is another major factor that goes into an acceptance. You need to see who your mortgage company is servicing the loan for. Many times it's not the same entity. Countrywide, for example, does service many of their own loans, but they also service loans for investors like Freddie Mac, Fannie Mae, and FHA. Why does this matter? Because different investors have different guidlines for acceptance. They have a certain percentage that they are willing to take, and this is usually non-negotiable. Only in very rare circumstances will they step out of these guidelines, and it won't be by much.
Here are some other items to be mindful of while you're working through this process:
- The departments that are handling these files are BUSY! Even after you've submitted your complete short sale package, it could be up to TWO MONTHS before anyone is even assigned to take a look at it. From there, it can be several more weeks to get an answer. They need to order their BPO, and review all the supporting documents. Some of the poeple working in these departments have 120+ files to process at a time. And with the influx of new short sale requests, banks are expediting employees through training programs. What used to be a position that required at least a year and a half of training through all the departments, is now a process that can take as little as 6 months.
- Be patient! (see above ;) ) This isn't like a normal retail sale where you can work out a deal with your agent over the weekend. This is a process, and will take months to complete.
- Deficiency judgements are a possibility. (I'll post specifically about this later)
Hopefully, you now have a better understanding of the short sale process. It's long, and fairly complicated. But in the end, everyone really does win. The bank has one more property that they don't have to take back and resell. The end buyer normally gets a pretty good deal on the home. The agents get extra business that they didn't always know was available. And most importantly, the homeowner avoids the foreclosure and maintains the ability to own a home in the future. Assuming that they've learned their lesson, and are diligent in repairing their credit from the late mortgage payments.
Fore more information on the home buying/selling process, please see www.NickDailey.com.