Posted By Josh Talayka on June 17, 2013
With Foreclosure filings beginning to ramp up again, it is expected that we will also begin to see an increase in the need for borrowers to have access to foreclosure alternatives, including short sales. Before a homeowner decides to list their home as a short sale, they should have at least a basic understanding of the short sale process in order to ensure as short sale is the best option for them.
Short Sale defined – A short sale is a transaction in which a lender agrees to take less than a full payoff at the time a property is sold. This is typically done by the lender in order to avoid the costs that are associated with the foreclosure process. However, in general; a lender will only consider approving a short sale once it has confirmed that: the property is indeed worth less than what is owed, and the homeowner has proven they have a financial hardship.
Timeline of a Mortgage
Before explaining the short sale process, it is important to understand the evolution of a mortgage and what parties are involved.
Homeowner Borrows funds – The Borrower is generally personally liable for the mortgage debt after they purchase the home or refinance their existing loan. In the event of a default, the borrower may lose the home to foreclosure if they do not take separate actions (short sale, modification, etc.).
Bank/Lender sells mortgage – After mortgages are originated, they are sold in pools to Investors. The pools of loans are managed by a Trustee who disperses payments to the investors
Bank/Lender becomes servicer – After the mortgage has sold the pool of loans, they continue to service the loan on behalf of the investor. These services include collecting payment and handling loss mitigation activities such as short sale negotiations.
For a short sale to be successful, there must be a benefit to all three parties described above (borrow, Services, Investor).
Homeowner – Avoids foreclosure and the stigma associated with it such as damaged credit and deficiency judgments. Another benefit is their ability to purchase again in a short amount of time when compared to a Foreclosure. (See Consequences of foreclosure for a more comprehensive list of how a foreclosure may impact a borrower).
Servicer – Will escape some legal fees, holding costs, and may be able to mitigate losses sooner than if the property goes to foreclosure.
Investor – Will net more money now, rather than les money after a foreclosure occurs less all the expenses that are involved in a foreclosure.
Short Sale – Basic Process
Short Sale Package – Although every lender may require additional documentation, or have their own application, every lender is going to require the following documents as a minimum requirement for a short sale package:
– 3rd Party Authorization form allowing you agent to negotiate on your behalf
– Hardship letter explaining your financial hardship and request for short sale
– Financial worksheet (generally on their form)
– Copy of the Listing agreement
– Tax returns (Last 2 years)
– Bank Statements (Last 2 months, all accounts)
– Pay Stubs (1 month’s worth) or YTD P&L (Profit and Loss Statement) is self employed
– Copy of the executed Sales Contract
– Buyer’s Pre-Approval Letter or Proof of funds if Cash
– Estimated HUD-1 (Closing sheet)
Although there are a few lenders that will begin the short sale process without a complete package, most will not (this includes and accepted offer). Once the short sale is opened, a bank/servicer negotiator will be assigned to the file. Once the negotiator has verified a complete package has been received, they will order a BPO (Broker Price Opinion) on the property in order to determine the properties current market value. The BPO is generally performed by a Licensed Real Estate agent who determines the property’s value based on area comparable. However, an actual appraisal will be performed if the mortgage on the short sale property is a FHA or VA loan.
Once the BPO has been completed, the lender will verify whether or not the current offer meets their Investor’s guidelines as to whether or not it is an acceptable offer. Lender guidelines listed below based on loan type:
FannieMae: Offer must net 92% of BPO Value or more
FHA: Offer must net 83-88% of Appraised Value or More
VA: Offer must net 88% of Appraised Value or More
Private/Portfolio: Net requirements on private and institutional portfolio loans will vary from lender to lender. An experienced short sale agent should be familiar with your lender’s requirements.
If the net payoff received from the accepted offer is below these amounts, the bank will either instruct the seller to counter the offer, or reject the short sale all together and close the file if it is too far below the net requirements. If the file is closed, then the short sale process will start over once a new offer has been received. Since it can take between 30 – 60 days to get to this point in the process, having to start over is the last thing that an owner will want to do as their credit will continue to be impacted. An agent who is experienced with short sale should know and understand these guidelines in order to price the home accordingly, and also to properly advise the homeowner on what offer the lender is likely to approve.
Once the servicer confirms that the accepted offer meets the investor’s requirements, the completed package will be sent to the investor for final approval. The final approval process will vary with investors, and could take anywhere from 3 – 45 days. If the investor determines the file is acceptable, they will instruct the servicer to issue an approval letter. After the approval letter is received, the sales process can move forward and close.
Short sale timetables:
To have a better understanding of exactly how long each step in the short sale process will take, please view: Short Sale Timetables
The Human Variable (negotiator)
Even if you and your agent understand the short sale process and submit all documents in a timely fashion which meets the lender’s guidelines, you still may fall prey to the ineptitude of an inexperienced short sale negotiator.
Although most lenders have by now instituted comprehensive training programs for short sale negotiators, there is no substitute to actual experienced. Unfortunately, the position of short sale negotiator can be very stressful, and has a very high turnover ratio with the majority of negotiators being replaced every 30-60 days. Because of this high turnover combined with the high demand for negotiators, many of the replacements come into this position with only brief training, and possibly little to no background in the financial/banking industry.
In general, a seasoned short sale agent will be able to pick up on the quality of the negotiator during their first interaction with them. Although this does not necessarily mean that the file will not be approved, it will generally require that the file may need to be escalated to management should it become apparent that the file is not progressing as it should.
The Human Variable (Real Estate Agent)
Although the negotiators and the lenders are generally the first to be blamed for a failed short sale, in many cases the fault can also lie with the real estate agent if they do not have an understanding of how this process works on the negotiators side of the table.
Depending on the lender, a typical short sale negotiator may be handing anywhere from 250 – over 1,000 files at a time. They are also generally rated based on the number of short sales they are able to complete on a monthly basis. Because of this, most negotiators may elect to focus on files that already meet their investor guidelines, and are listed with an agent that understand their time if limited. Lengthy voicemails, emails, or incomplete short sale packages may present themselves to a negotiator as warning signals that this particular file may be more work than others. As a result, your file may find itself at bottom of the proverbial pile.
With a basic understanding of the short sale process, we now can touch on the 1st and most important step in the short sale process; selecting an experienced short sale agent. Ultimately, your agent will be driving the short sale process, and it is important that they understand where they are going, and the obstacles they may encounter along the way. The following are a few things you will want to be aware of during your interviewing process:
Knowledge of current programs – There are many programs available to homeowners which offer options in both home retention (modification) and release (short sale, Deed in lieu, etc.). Although it’s nearly impossible to keep up on all the programs as some may change on a weekly basis, an experienced short sale agent should have at least a general knowledge of the programs that are currently available no only though your lender, but also through state and federal government agencies, as well as area non-profit organizations.
Designations – The time requirements placed on an agent whose primary business is Short Sales does not leave much time to sit through the hours of class room training needed for most designations. Although the majority of experienced short sale agents will have a few designations they have obtained through training, you should be aware that there are also many agents who have a habit of collecting designations, but may not be very experienced with short sales.
Should you happen to be interviewing an agent whose business card includes a string of designations, you will want to make sure they can demonstrate that they have the knowledge and experience to back up those designations. One question you can ask is how long they’ve had their license. If they have been in the business less than a year and already have 6-7 designations behind their name, there’s a good chance that they have spent most of their time obtaining designations and not negotiating short sales. Although lack of experience does not necessarily mean they will be unsuccessful in getting your short sale approved, it is something you will want to be aware of.
Memorizing Scripts – One of the first things all agents are taught to do is memorize scripts which helps us overcome people’s objections. With short sales, these scripts may include basic facts about programs and lenders. As time goes on, an agent will gain experiences and will replace these scripts with meaningful conversation which should relay not only facts, but also the agent’s personal experiences. In general, when asking questions or raising objections, ask yourself if the agent is actually engaging your concern, or does it feel like they are reciting a rehearsed canned explanation.
Instinct – After the interview process, you ultimately should be asking yourself if you feel this agent will be able to effectively negotiate a short sale, while keeping you best interest in mind.
Should you have any questions or need further information,
please don’t hesitate to contact me, (775) 220-1630
Or visit my website: www.SellingHomesinReno.com
NAR designated: Short Sale & Foreclosure Resource
Office: 775 850 5953
Toll Free: 877 922 5900
Cell: 775 220 1630
Fax: 775 850 5901
985 Damonte Ranch Pkwy, Ste. 110
Reno, Nevada (NV) 89521
Legal disclaimer: I am not an attorney, tax professional, modification specialist or credit counselor. The information contained in this article/blog is intended to provide general information on the subject and not to provide any legal, tax, or credit advice. You should not act upon this or any information without first seeking independent tax and/or legal counsel.