FHA Short Sale
As you no doubt realize by now, short sales come in a variety of forms, depending on who owns your mortgage loan. If you have a loan backed by the Federal Housing Administration (FHA), the government has a short sale program just for you.
Known as the Pre-foreclosure Sales Program, and overseen by the U.S. Department of Housing and Urban Development (HUD), this short sale program is quite similar to the conventional short sale process.
The FHA short sale, however, differs in ways that benefit the homeowner: All proceeds from the sale, despite the fact that they aren‟t enough to cover what you owe the lender, satisfy the debt in full. HUD pays the homeowner $1,000 if the home sells within 90 days of the date of application.
HUD allows for your real estate agent‟s commission and certain closing costs to be included. If the buyer is using an FHA loan, HUD will pay up to 1 percent of his or her closing costs. Many buyers request 3 percent of closing costs, so the agent must submit a variance to HUD to meet this request.
FHA Short Sale Rules
Like all short sales, the FHA short sale transaction must be “arm‟s length.” Additionally, HUD has specific rules on which offers the homeowner can approve. HUD calls this the “tiered net proceeds requirement,” and it looks like this:
During the first 30 days that the home is on the market, the seller is prohibited from accepting any offer that is lower than 88 percent of the home‟s appraised value. During the next 30 days, the homeowner is instructed to only approve offers that amount to at least 86 percent of the home‟s appraised value.
From then on, HUD will only entertain offers with a purchase price of at least 84 percent of the appraised value of the home. HUD also has rules about what concessions the seller can make to the buyer. The following concessions are prohibited: Money back for repairs. Paying for the buyer‟s home warranty.
The seller can‟t allow for the payment of discount points on other than an FHAbacked loan. Contracts allowing for the payment of the lender‟s title insurance fee can‟t be accepted. Imagine an inexperienced real estate agent, unfamiliar with any of these regulations, at the helm of an FHA short sale.
These regulations are typically what trips up the novice agent and cause these transactions to fail. This is why it is so important to take the time necessary to completely vet each agent that you interview. Submission of a contract to purchase that includes theseconcessions, or a lower-than-acceptable price, may end up derailing the entire transaction, and pushing you into foreclosure.
Fha approval requirements
FHA Pre-Foreclosure Sales Program approval requirements are quite similar to those in a conventional short sale: The homeowner must occupy the home unless forced to move because of a job, the homeowner is deceased, or the homeowners are divorced. In any of these cases, the home must not have been rented out for more than 18 months. You must prove that you can‟t pay your mortgage payments.
You must be a minimum of 31 days delinquent on your mortgage by the time the sale closes. . A Homeowner’s Guide to Short Sales 27 Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
VA Short Sales
The United States Department of Veteran‟s Affairs (VA), like the Federal Housing Administration (FHA), doesn‟t actually provide loans, but guarantees their repayment. Lenders love these guarantees, and these types of loans allow lenders to offer low-to-no-down-payment loans with better interest rates and terms than conventional loans.
If you have a VA-backed mortgage and you can no longer make your payments, and you can‟t sell the house for what you owe your lender, you may want to consider the VA‟s version of the short sale, known as a Compromise Sale. While similar to a conventional short sale, there are some distinct differences that you should know about.
First, the lender will receive the full balance of the loan, not a shorted amount as it does in the conventional short sale. Next, the VA will pay the veteran $1,500 to assist in his or her relocation. VA Compromise Sale Eligibility Requirements The VA will first review your situation to determine whether you have any assets that might be sold to satisfy the deficiency.
Then the VA will consider your financial situation, looking for a significant hardship. Those hardships considered severe enough to quality for a VA compromise sale include: A decrease in income. Major medical expenses. The death of any partner that financially contributes to the household.
Beware of Scams The Veteran’s Administration cautions veterans to be aware of some of the scams that have popped up during the housing crisis. Do not sign any paperwork offered by any individual or company, other than the VA or your lender, that offers to pay off your mortgage. Involuntary relocation out of the area .
VA Compromise Sale Requirements
The VA will appraise the home to determine if the compromise sale will net it more money than a foreclosure sale. If it will, the following rules are in place:
The VA will not accept less than current market value for the home. The loan must have been taken out before December 31, 1989. The lender must agree to write off that portion of the debt that exceeds the maximum guarantee.
The home must have no other liens. Steps to a VA Short Sale While your real estate agent will go over the rules and requirements for the VA compromise sale, there are certain steps to take to ensure a successful transaction: Your agent will contact your lender’s loss mitigation department to advise it that you can no longer make your loan payments, and will be selling the home via a Compromise Sale.
The home is listed and marketed to the public. You must gather the documents required for inclusion in the Compromise Sale package. Your listing agent will assist you with this, and send it to the lender with the purchase agreement.
Once approved, the buyer‟s lender hires a VA-approved appraiser and checks the property‟s title for liens and other clouds. As with the other government-sponsored programs and conventional short sales, the lender pays your agent‟s fees as well as customary closing costs. You are not expected to bring any money to the closing table.
Are you ready for some more good news?
A veteran is typically eligible to purchase another home within two years of closing a compromise sale.
Advantages of Short Sale vs Foreclosure
One of the many roadblocks that may pop up during your journey down the short sale highway is your Private Mortgage Insurance (PMI) company. What is PMI? PMI is insurance for your lender. (Yes, you pay for it, but it only protects your lender).
If your down payment on the house equaled less than 20 percent of the sales price or the appraised value, you were required to purchase PMI. While most homeowners find this extra monthly charge onerous, without PMI, they would not have been able to purchase the home unless they came up with a 20 percent down payment.
(So, it is a necessary evil). The good news is that as soon as you reach a 20 percent equity stake in the house, PMI is eliminated. The bad news is that the average American homeowner lost 30 percent in home value during the recession.
Thus, PMI is a prolific nightmare – for millions of Americans – when it comes to short sales. How Does Having PMI Affect the Short Sale? When a homeowner defaults on a mortgage insured with PMI, the mortgage insurer pays the lender a percentage of its loss. The size of the loss depends on whether the home was short sold or foreclosed.
In a short sale, the loss typically includes the loan balance and accrued interest, realtor commissions, and closing costs. If the home goes to foreclosure, the loss will also include unpaid property taxes, legal fees, maintenance and hazard insurance, among other items. What percentage the insurer pays varies as well.
For instance, Freddie Mac and Fannie Mae require that the coverage level of PMI be based on the borrower‟s loan-to-value ratio.The first task of the insurer, when notified that there is a short sale request, is similar to that of the lender:
to determine whether it will realize more money from the short sale or from a foreclosure. Mitigate the losses as much as possible. The second factor taken into consideration is whether to pay the loss now (with a short sale), or put off paying the loss until further down the road (with a foreclosure).
Now, tell me, which would you choose – pay now or pay later? The choice is obvious, which is why many mortgage insurance companies don‟t care if the house goes into foreclosure. This gives the insurer leverage over the homeowner when it comes to accepting or denying the short sale request.
An Example Allow me to introduce you to my clients, Monty and Lily. I determined that the lender‟s loss, at the time of the short sale approval, was close to $50,000. The lender had not initiated foreclosure proceedings at that time, so foreclosure couldn‟t possibly occur for another year.
During that time, Monty and Lily would not be making house payments, and for every month that they didn‟t, the amount of money the lender was losing would swell. In Monty and Lily‟s case, that amount was $1,785 a month. By the time the lender went through the foreclosure process, that $50,000 initial loss had ballooned.
In fact, the interest alone was over $20,000 and there were still all the additional costs of foreclosure to tack on to that. Obviously, in this case, the insurance company will best mitigate its loss by agreeing to let Monty and Lily short sell the house.
Had foreclosure proceedings already begun, however, the company may not have been amenable to the short sale. As in all things having to do with the short sale, however, there‟s a flip side to my client‟s seemingly happy ending.
Remember, the PMI company has leverage over the transaction. The insurer says they‟ll allow the short sale ifMonty and Lily sign a deficiency agreement. There is Good News When faced with the demand to contribute money to mitigate the insurer‟s loss, the homeowner has several options:
Have the buyers increase their offer. Contribute cash to help offset the insurer‟s loss. Sign a promissory note for the contribution to the insurer‟s loss. In Monty and Lily‟s case, the buyers refused to increase their offer and the couple had no money to contribute to the insurer‟s loss. To get the deal done, they opted for the promissory note.
The insurer wanted $25,000. I negotiated a deal that included a reduction to $10,000, payable at $100 a month, interest-free. The Moral of the PMI Story Actually, there are two morals to this story: If you have PMI, prepare yourself for the possibility that you may have to either come up with some cash or sign a promissory note to get the short sale to the closing table.
This once again illustrates how critical it is to hire a real estate agent that is a bona fide short sale expert. The novice hasn‟t a clue about how PMI can kill the deal. The rooky short sale agent lacks the negotiating skills required to knock down the amount of money the insurer demands.