Calculating Income for a Short Sale - Is There a Dual Standard?

Real Estate Agent with RE/MAX Dallas Suburbs TX Broker 0513551

December 23rd was the frustrating end to a five-month attempt to complete a short sale. We listed the property in July and executed a contract in early August. While we worked the package with both lenders, our first buyer walked. We quickly found a new buyer who was more than willing to wait for us to get this done.

Calculating Income for a Short Sale is There a Dual Standard?

There were two liens with two different banks. The second was fine with $3000. The first (who will remain nameless) was willing to work with us but bounced our file from negotiator to negotiator. Of course, we continued to provide updated documents and various affidavits. We also had to release the home form the bankruptcy so we could move forward. While slow, we were making progress.

In the final week, things took a turn for the worse. The negotiator took the last two pay statements we provided and came up with a monthly income that was $1000 over what we had submitted. One of those two pay statements showed $800 in overtime pay. The seller is a police officer and had moonlighted at some local football games to make a few extra dollars.

The bank averaged the two pay statements and added the extra income from the football games to arrive at a net monthly pay. I discussed the issue with the negotiator and her supervisor. They declined to reopen the file and it will be sold at a Trustee Sale on January 4th.

Let’s look at their logic.

The December pay statement with the overtime pay showed YTD gross overtime of $2200. Clearly overtime was very rare. An originating lender would have not allowed it to qualify for a mortgage so why should we use it to undo a mortgage? I argued that $2200 gross was about $1750 take home and if they felt the need to include it, they should divide it by 12 and add the result to the monthly figure. This would have added $145 to his monthly take home.

The football pay is $195 gross for 10 games or $1950. After taxes, the take-home is about $1500 or $125 a month.

Neither overtime nor the football pay may exist in the future and we would have ignored it on the origination side unless we had a letter from the employer stating that the pay would continue.

I’m normally very supportive of the banks, but in this case they have applied a dual standard to accounting for income. If they had followed the origination standard they would not have allowed any of the income. Even if they used the annual figures (converted to monthly), the seller would have been negative cash flowing and they would have approved the Short Sale.

Lose, lose, lose, lose. The seller has a foreclosure on his credit report, the bank has to foreclose and incur the costs to sell the property (likely for less than the Short Sale offer), the investor takes a greater loss, and the current buyer has wasted 3 months waiting on this to be approved.

This is the kind of thing that winds up in a lawsuit...

Tom Branch, Broker, CDPE, SFR 


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Tom Branch and Gina Branch, The Branch Team with RE/MAX Dallas Suburbs, service the greater North Dallas suburbs including Dallas, Plano, Allen, McKinney, Frisco, Lewisville, and Carrollton.  While Gina concentrates on traditional listings and buyer/tenant representation, Tom specializes in assisting distressed homeowners to avoid foreclosure.  Tom and Gina have published two books (Achieving Rock Star Status and The Field Guide to Short Sales) and are available for speaking engagements in the greater Dallas - Fort Worth Metroplex. Subscribe to The Branch Team Blog.

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Kathy Denworth
Century 21 Schwartz Realty - Islamorada, FL
Realtor in the Florida Keys, Islamorada, Key Largo

Short sale are a huge pain in the butt. The banks waste so much time that the values plummet. I just lost one after 10 months. The buyers walked because it took to long.

Dec 25, 2010 06:01 AM #1
Kelsey Barklow
Hurd Realty - Johnson City, TN

The people working the bank side are overworked (and consequently underpaid) and it seems to me that most of them really don't care all that much. Everyone loses when that happens.   

Dec 25, 2010 06:08 AM #2
Maya Swamy
Funds Available - Long Beach, CA
Ph.D. Long Beach, CA -

This seriously seems like a negotiator error. As a loan broker I can assure you we would not be able to use this income to qualify the loan. Is there a supervisor you can contact to have this reversed?

Dec 25, 2010 06:13 AM #3
Loreena and Michael Yeo
3:16 team REALTY ~ Locally-owned Prosper TX Real Estate Co. - Prosper, TX
Real Estate Agents

Many times, things and calculations do not make sense. I have yet another rant to complain similar to this, but not on a short sale.

Nevertheless, Merry Christmas to you and Gina!!!!!

Dec 25, 2010 07:14 AM #4
Rodney Mason
Guaranteed Rate NMLS# 2611 - Atlanta, GA
VP of Mortgage Lending - AL, FL, GA, SC, & TN

So long as the overtime income has been received for 24+ months, then yes, a lender might be able accept it for qualifying income.  HUD's rule for overtime income for FHA loans is: "Overtime and bonus income can be used to qualify the borrower for a mortgage if he/she has received this income for the past two years, and it will likely continue. If the employment verification states that this income is unlikely to continue, it may not be used in qualifying.  The lender must develop an average of bonus or overtime income for the past two years. Periods of overtime and bonus income less than two years may be acceptable, provided the lender can justify and document in writing the reason for using the income for qualifying purposes."

If the police officer has a 24+ month history of moonlighting and reports that income on his Schedule C, then yes, we may be able to include that income as well. 

Dec 25, 2010 12:08 PM #5
Gabe - Loss Mitigation Analyst -
Loss Mitigation Services - Aventura, FL

It doesn't seem like the income was the issue here but something far more obscured that most agents aren't aware of and that is.

Fannie and Freddie are reimbursing banks full mortgage value, which is higher than market value of the house. The banks are getting the market value therefore it's in their best interest to force a speedy foreclosure.

If you have time please visit this blog here in activerain and watch a video that will send chills to your spine

Dec 26, 2010 01:42 PM #6
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