Understanding the Short Sale Process

Borrowers who are facing foreclosure may ask the lender to accept a discounted payoff on their loan. This is called a "short sale" or "short payoff". It allows the borrower to avoid a foreclosure action, and may offer the lender an expedited and less costly resolution of the situation.Historical trends tell us that the number of short sales has increased when changing markets soften home prices and leave homeowners with a higher mortgage interest rate or loan balance. For the consumer, negotiating a short sale with the lender may seem a daunting task, particularly at a stressful time when foreclosure looms. A short sale allows the borrower to maintain a better overall credit record than with a foreclosure. It also allows time for the homeowner to relocate on a more convenient timetable instead of facing eviction and possibly a deficiency judgment down the road. A short sale may also help the borrower avoid or minimize a tax liability, although it is important for the borrower to discuss the situation with a tax advisor to be sure of the long-term effect.Most lenders have specific criteria to consider a short sale that relate to the borrower's ability to repay the debt. Some lenders will consider a short sale only when the property is distressed or requires extensive work or repairs. If the lender foreclosed on this type of property, it would have to pay for all the repairs necessary to sell the property. A short sale may represent a more cost-effective way to pay off the loan.For agents, assisting a homeowner with a short sale means not only a commission but the satisfaction that comes from helping someone out of a tough spot. The benefit to the borrower is that the agent can help negotiate with the lender and field offers from potential buyers as well as collect documentation that goes with such a sale.The tips on the following pages review many of the aspects of a short sale, but consumers are urged to consult their attorney, HUD homeowner counseling center, tax professional, and other appropriate professional agencies for assistance.

Determining a Short Sale Price

For the owner or agent, selling a short sale property is much like selling any other home - with a few extra steps thrown in for good measure. Remember that state law also governs the activities of those who act on behalf of property owners who are facing foreclosure, so an in-depth working knowledge of the process is essential. Here is a handy checklist to help sort through the details.Ask for details of the loan by sending a loan information request letter signed by all sellers. Order a preliminary report/title commitment from a title company.

Estimate a purchase price by:

Calculating current outstanding balances on all Deeds of Trust, Checking for other lien holders and negotiate for a reduced payoff, Accepting that commission may be reduced if there are insufficient funds, Reviewing all other liens and judgments, Comparing the market value to the amount needed by the seller, Seeking the right price to make a quick sale

Negotiate a purchase price with the lender, including:

• Commission
• Repair costs
• Other fees including creative financing options

Factor in other closing costs that may be required such as:

• Escrow
• Title insurance
• Recording fees

After you have established the sales price:

• Consult a tax professional
• Note Notice of Default (NOD), foreclosure pending and terms to be approved by the lender on MLS or other listing services
• Order inspections and obtain comparables for the appraiser
• Disclose, disclose, disclose to any potential buyers
• Submit all offers to the lender along with the buyer's appoval letter

Short Sale Documents

For those who will negotiate with a lender to begin a short sale, the first step is to determine the equity position of the homeowner.

Be prepared with this information:

• Is the seller in bankruptcy? (The court and bankruptcy trustee must agree to the sale)
• Current loan balance, type of loan, interest rate, impound account information, and other loan details
• Past due payments
• Has a Notice of Default (NOD) or Notice of Trustee's Sale been recorded?
• Other liens, judgments and taxes

To begin discussions with the lender's Loss Mitigation Department (which may also be called the Foreclosure, Short Sale, Loan Modification or Reinstatement Department), have these documents handy:

• Hardship letter from the homeowner explaining why mortgage payments are not being made
• Copies of borrower's most recent bank statement, pay stubs, income tax statements (usually two most recent of each statement are required)
• Broker Price Option (BPO) letter
• Net sheet showing all expenses and what the lender will net at close of escrow
• Preliminary report/title commitment from a title company
• Listing Agreement
• Marketing plan for the home

After written confirmation of the lender's acceptance has been received, these items will be required:

• Signed copy of complete sales contract
• Copy of buyer's loan application Copy of buyer's deposit and receipt from escrow
• Updated HUD/settlement statement
• Updated preliminary report/title commitment, if applicable

Short Sale Tips

Tips for Working with the Lender on a Short Sale

Each lender will have its own set of rules, so be sure to talk with the appropriate department for its list of requirements. Inquire about the time frames for all processing, and send everything requested as soon as possible. Be aware of the foreclosure date and ask for a postponement if possible. Discuss the benefits of a short sale with the lender. Confirm everything in writing. Collect all the contact information (including physical address and/or delivery option) of the appropriate person or department at the bank or lending institution.

Short Sale Escrows

An Escrow team is in place to assist you through a short sale escrow. There are some special requirements, so be sure to discuss the transaction thoroughly with your escrow officer when the order is opened.

When you open your escrow, be sure to advise your officer that the property is a potential short sale. The preliminary report/title commitment will show all vested owners of the property and all recorded liens. The seller will also be asked to complete a Statement of Information (also known as an "SI" or an "S of I") which will help determine any outstanding judgments.

• Demands for payoff on the existing loan should be requested after the seller has negotiated with the lender.
• Demands on other existing liens, judgments or tax liens should be requested after the seller has negotiated with the other creditors.
• Once the existing lender approves the HUD proposal, no changes can be made unless the escrow officer receives written confirmation from the lender.