How to Qualify for a Short Sale
The short sale qualification process has evolved over the years, and common misconceptions persist. Let’s see if I can clear these up by giving you the facts. The three qualification guidelines most lenders demand include:
If you hold major assets, you will be expected to dissolve them to pay down your debt to the lender.
Financial hardship –
You are unable to meet your current monthly mortgage payments.
Insufficient equity –
The proceeds from the sale of the home at current market value are insufficient to pay what you currently owe on the property.
Let‟s take a closer look at these guidelines. Insolvency While the word may conjure images of the unfortunate guy that lives under the freeway overpass, insolvency simply means that your debt exceeds your assets.
What the lender is looking for when considering insolvency is whether you have any means to pay down the deficiency after the short sale. If you own a boat, stocks, or have any other assets, you will be expected to liquidate them to help pay down the balance of the loan.
This is not to say that you must be flat broke and ready to join the guy under the freeway; only that the lender is assured that your financial situation isn‟t going to improve any time soon.
Money in the bank to cover basic living expenses won‟t disqualify you from a short sale. Financial Hardship Your lender wants to know how you got into this pickle. What hardship came about that makes it impossible for you to pay your mortgage?
Now, one man‟s hardship may be another‟s minor annoyance. A famous athlete that has his multi-million dollar per year contract cut in half is still amazingly wealthy, but that cut in his finances is a hardship, just as it is to the single mom who loses her well-paying job and is now working for minimum wage.
The most common hardships that befall homeowners are the loss of a job or a reduction in income, medical problems and the ensuing bills, involuntary job transfer, and the death of a spouse or other person who contributed to the household‟s income.
While it‟s tempting to many homeowners, a lender typically won‟t grant a short sale simply because you no longer want to make payments on a house that‟s lost a significant portion of its value.
If you have the means to make your payments, or pay the shortfall, believe me, your lender won‟t entertain a short sale. When a borrower is insolvent and proves a valid hardship, the lender next looks to how much money the house will bring on the current market.
This requires the compilation of a broker‟s price opinion (BPO), an analysis of the home’s current market value. Market value is simply what a buyer is willing to pay for the home. The only way we can determine this amount is by comparing your house with those that have sold over the past several months. (These are called “comps,” short for “comparables”).
is the operative word here. Although your home may be lovely, it isn‟t worth the same amount of money as a home that is larger, newer, or in better condition, with in- Acceptable Hardships Loss of income, divorce, job transfer, major illness, unexpected medical expenses and the death of a spouse qualify as hardships.
Military deployment, incarceration, and divorce are also valid hardships. Pregnancy or adoption (increasing the size of your family) is typically not considered a hardship. demand amenities.
After compiling a list of several comps within close proximity to the subject property (i.e., your house), the homes are compared according to age, size, condition and upgrades. In other words, a three-bedroom home is generally not worth as much as a five-bedroom home. A 4,500 square foot home is worth far more than a 1,200 square foot home.
A remodeled home is typically going to sell for more than a fixer-upper. Of course, if the three-bedroom home has been completely remodeled with an expanded kitchen and new “everything,” it will sell for more than the five-bedroom fixerupper.
The process of determining current market value is complicated, and it requires an agent that is experienced in the procedure. Once we know the current market value of your home, we‟ll deduct that amount from what you owe on the house.
If the result is a positive number:
you have equity! On the other hand, if the result is a negative number, you have insufficient equity to pay off your debt with the lender. Now that you know whether or not you qualify for a short sale, let‟s dive into the process.
Short Sale Tradition : Step By Step
The short sale transaction is very much like a traditional real estate transaction with a few exceptions. These exceptions, however, cause short sale transactions to be cumbersome and protracted.
The more people involved in any process will typically slow it down, and, unlike a conventional sale, there are teams of people involved in a short sale. Like any process, however, there are certain steps that must be taken to arrive at a successful conclusion.
Determine Who Owns Your Loan The only way to determine which short sale program you need is to find out who owns your loan. Get out your payment booklet or statement and have it handy when you meet with your real estate agent for the first time.
Your agent will find out what type of loan you have and who owns it. Sometimes the bank you make payments to is merely a servicer, and doesn‟t own your loan. This is important information to help you determine whether you need to do a HAFA short sale, an FHA short sale or a conventional short sale.
Hire a Proven, Certified Short Sale Listing Agent Read any book or any article by any expert on short sales, and notice the typically large amount of time the author spends addressing the topic of hiring a real estate agent.
This is the most important step you will take, as your agent can literally make or break the deal. (We‟ll take a closer look at the process in Chapter 5). Avoid any agent who has a “day job” and works in real estate part-time. Avoid agents who have never handled a short sale, as well as those who have only handled a few.
Only agents that perform shorts sales on a regular basis can keep up with the ever-changing guidelines and necessary strategies to get the deal done quickly to avoid foreclosure.
Only a high-volume short sale agent has the inside connections at various lenders to help facilitate a quick process.
The Agent Contacts Your Lender The first thing I will do is prepare the Authorization Letter, a copy of which you will find in Appendix iv. By signing this form, you, the homeowner, authorize the lender to release information to me, which allows me to communicate with the lender on your behalf.
Examples of information that I may need to facilitate your short sale include: Your lender‟s requirements for a short sale. Information about your loan. The status of foreclosure proceedings, if any.
Prepare the Short Sale Package The short sale package contains all the documents your lender requires to determine whether you, the home, and the buyer qualify for a short sale. To save time, I counsel my short sale clients to gather all of his or her required short sale package documents well in advance of when we will need to submit.
That way, when we receive an offer, we won‟t waste time compiling the package. (See Appendix iii for a list of the contents of a typical short sale package).
Market the Property Your listing agent, if you choose wisely, will market the home as he or she markets all of her other listings. This includes, at the very least, photographing the home and entering the home‟s information into the Multiple Listing Service database. I typically go above and beyond what other area agents do.
Since I‟m known as somewhat of a tech nerd, my listings generally end up on the first page of Internet search engine results, causing the home to receive far more exposure than it would had it been listed with another agent.
Again, I am not trying to toot my own horn here. In fact, the lender requires proof that all the proverbial stops were pulled out in the marketing of the short sale listing.
Show the Property Showing your home to potential buyers is a team effort between you, me and the buyer‟s agent. Your job as a member of this team is to ensure that the house is in top shape while it‟s on the market: Clean, de-clutter and snazz up the curb appeal.
My job is, of course, to field calls from buyer‟s agents, and ensure that all potential buyers actually have the credentials and money for loan approval. The buyer‟s agent‟s job is, naturally, to bring in the buyer and keep her motivated during the transaction.
Negotiate with Buyers
This is my job and – ok, I am tooting my own horn here – I‟m darn good at this. While certain negotiating techniques can be learned, tenacious negotiators and dealmakers are born, not made.
I happen to enjoy the art of the deal, thus, I have honed my negotiating skills over the years to ensure my clients get the best deal possible. Step 8: Agent Submits the Short Sale Package Once we have an accepted offer, the purchase agreement and all addenda are added to the short sale package; then off it goes to the lender.
My job is far from over, however, as I have to keep tabs on which stage of the process your file is in on a weekly basis. This entails making lots of phone calls to my network of contacts at the various lenders.
The Lender’s Processor Keep in mind that your short sale package is most likely not the only one arriving at the lender on any given day. Yours, as well as others, will end up with the processor who is responsible for performing a complete audit, ensuring all required documentation is included.
Your information is then added to the lender‟s system. It may take up to one month for your file to leave the processor and head over to the negotiator. Step 10: The Lender’s Negotiator The lender’s negotiator is responsible for the negotiations on the lender‟s end, negotiating the short sale on behalf of the lender. (This person used to be known as the “loss mitigator,” but is now typically called “the negotiator”).
Your short sale package will land on the negotiator’s desk after being entered into the system. Keep in mind that the negotiator does not have the power to make the final decision. His or her sole aim is to determine: Whether you have assets that can be contributed to pay down the loan balance.
The value of the house. How to negotiate for the most money the lender can realize in the sale. Once the negotiator receives the best deal for the lender, and the lender approves, the negotiator will send me a letter, confirming approval.At that time, we open escrow.
The Escrow Process When the lender officially accepts the offer, the buyer’s agent collects his or her client’s earnest money deposit and places it in the listing broker’s trust account. Think of the title company as an unbiased third party that collects the money and all of the documents required for the transfer of the property.
Most of this activity happens behind the scenes for both the seller and the buyer. The title company will perform the closing, and usually gives the seller the option to pre-sign ahead of time to avoid sitting at a closing with the buyer.
Closing In the meantime, your lender will assign a closer to the file. The closer works to close the deal on the short sale bank’s behalf. Most short sale banks require that they be provided the final HUD-1 (Settlement Statement) 48 to 72 hours before closing to ensure that all the information matches the data contained in the approval letter they originally issued.