A Short Sale Synopsis
Considering the current state of today’s real estate market, short sales are going to become common occurrence. Being familiar with them and the process of achieving them is going to be an important benefit to those in the industry.
A mortgage servicer may be willing to pursue an arrangement of this kind in a foreclosure situation, provided the sale of the property has not been completed. Even FHA and VA servicers will often consider a short sale, provided they can comply with the insurers’ or guarantors’ guidelines.
When listing a property where a review of the seller’s financial circumstances reveals that a short sale may be necessary, a market analysis will further help to determine if the seller will need to bring funds to closing. If this is the case, and those funds are not available to your seller, then process of requesting a short sale should begin.
Your listing agreement should have a cancellation clause in the event you cannot complete a short sale arrangement with the mortgage servicer. An example of such would be “Seller may cancel this agreement prior to the ending date of the listing period without advance notice to broker, and without payment of a commission or other consideration, if the property is conveyed to the mortgage insurer or the mortgage holder”. In addition, the agreement should be subject to the lien holder’s approval of the short sale.
The seller will need to provide the lender with financial information to prove that the seller does not have the ability or the assets to bring funds to the table. This typically includes copies of recent pay stubs, federal income tax returns, a financial hardship letter, a preliminary HUD statement, and a copy of the contract. (Occasionally the lender will start the process before the contract stage. In this case a market analysis will be required.) In addition, some lenders may require reviewing a copy of the appraisal. They are looking to verity that the value truly is not there.
When there is a second mortgage on the property, the process becomes a little more difficult. The first lien holder has the ability to wipe out the second mortgage debt in the foreclosure, and therefore may be reluctant to give up a portion of their payoff so that the second mortgage lien holder can also receive funds.
There is a motivating factor for mortgage servicers and lenders to participate in a short sale. A foreclosed loan can reflect negatively on their history, and their standing with FNMA and others. Given the choice, they often would rather work out a short sale, taking less on the payoff and avoiding the negative effects of a foreclosure.
According to HUD, short sales account for approximately 50% if all pre-foreclosure arrangements with conventional loans. Since these types of lenders are more familiar with the process, it tends to be the preferable option. The requirements are not as stringent as FHA may be. All parties are involved in the approval, including FNMA, Freddie Mac and PMI.
FHA insured mortgages have additional basic guidelines. They include:
Payments must be at least 2 months behind
Property must be owner occupied
The reason for the default must be unavoidable, involuntary, or beyond the homeowners control
The house must appraise for at least 70% of the unpaid principal balance
The contract price must be at least 95% of HUD’s appraised value
The net amount to the lender after all closing expenses must be at least 87% of HUD’s appraised value
There may be a pre-foreclosure sale incentive of $1,000.00