Process of the Short Sale
After the bank’s collection department has attempted to get the borrower current and failed several times, the loan is deemed in permanent default, and the bank transfers the loan to the loss mitigation department.
§ Usually the first notice of this letter from the lender demanding all monies owed and intent to accelerate the note.
§ Usually the borrower has 30 days to pay the entire sum owed and bring the loan current.
§ Partial payments are not accepted by the lender after the loan is accelerated.
§ If the homeowner is unable to pay off the acceleration demand, the lender then will record a public Notice of Default and Intent to sell against the property.
§ The Notice of Default is recorded at the Country Recorder’s Office
§ You, the homeowner, will probably receive at least one copy of the document, more like several including certified mailings.
The Notice will be filed by an entity other than your bank. It is still binding.
The lender has the right to auction the property at a foreclosures sale 120 days after filing.
The last step in the foreclosure process is the actual Trustee Sale
A Notice of Trustee Sale can be filed at the recorder’s office after 120 days from the previously filed Notice of Default.
§ The Trustee Sale may also need to be published in a newspaper prior to occurring.
§ The homeowner can remove the property from the sale by paying all accrued charges before the sale occurs in a lump sum.
§ At the Trustee Sale, usually held on the Courthouse Steps anyone who is interested in the property can make a cash bid for it.
§ If the minimum sale price or reserve price is not met, the bank owns it.
§ The Foreclosure Mediation Program was established as a result of the Assembly Bill 149, passed during the 2009 session of Legislature.
§ This law establishes a Foreclosure Mediation program for owner-occupied residential properties that receive a Notice of Default and Election to Sell – filed on or after July 2, 2009
§ Homeowners can sit down with their lenders to work out alternatives to Foreclosures, assisted by a mediator between the two parties.
For the Mediation program:
§ You must occupy the home as your primary residence.
§ The paperwork requesting mediation must be sent within 30 days of the filing of the Notice of Default.
§ If you have filed for bankruptcy you are not eligible.
§ The cost is usually around $200.00
§ The lender is required to participate and to act in “good faith” during the mediation.
§ If the homeowner and lender reach an agreement during mediation for forbearance, loan modification, short sale, or deed in lieu, the foreclosure cannot proceed.
§ If the lender acts in bad faith the homeowner can seek to sue and collect damages.
What Is a Short Sale?
§ A short sale is when your lender agrees to accept less than the amount owed to satisfy the mortgage note.
§ You must qualify for a short sale by demonstrating that you are either unable to make your payments or will be unable to make your payments due to personal circumstances.
§ If you have a 2nd mortgage, BOTH lenders must agree to accept the less than full payment.
§ You do not have to live in the property.
§ You do NOT have to be late on your payments.
§ Loss of Income – job loss, cut in hours or wages
§ Divorce or Death
§ Job Transfer
§ Increased Mortgage Payment
§ Little or no Equity in the Home (selling price is less than what you owe)
§ Your lender will require a complete financial picture from everyone on the mortgage.
§ Information requested:
§ Hardship letter explaining why you are unable to pay
§ Financial Worksheet which is a one month budget
§ Copies of Tax Returns for the last 2 years.
§ Copies of All Bank Statements (last 2 months for all borrowers)
§ Copies of Pay Stubs (last 2 pay periods for all borrowers)
My Short Sale Team will assist you in preparing and submitting a complete financial package and obtaining approval for you to enter into a short sale on your property.
§ Your home must be listed with a Real Estate professional (as myself) and Actively Advertise on the Multiple Listing Service.
§ Your lender will not allow you to sell your own home.
§ Your lender will typically not allow you to sell your home to anyone who is related to you, in business with you, or a neighbor.
§ Your lender will accept an offer on your home which in within a certain percentage of market value, NOT the amount of money which is owed.
§ Your lender will determine market value by having your home appraised, either by a licensed appraiser or another Real Estate professional.
§ FHA loans have their own unique short sale process which establishes a sale price acceptable to the lender before the property is put on the market.
§ VA loans, Fannie Mae, and Freddie Mac loans all require a valid purchase contract before the lender evaluates the purchase price.
§ Non-government loans which qualify under HAFA guidelines can also establish a sale price acceptable to the lender before the property is marketed.
Phase 1 of the short Sale Process
1. Gathering information
2. Qualifying Borrowers for the Short Sale
3. Establishing Market Value of the Property
4. Qualifying the Purchase Agreement and Buyers Ability to Close
5. Contracting the Various Insurers and Investors
6. If there is more than one mortgage on the property, this will have to be repeated for each lender!
Authorization to Release Information
1. Your lender will require us to have written authorization from you to negotiate the short sale on your behalf. (I will send you the required forms that need to be signed.)
2. These forms authorize us and the designated Title/Escrow Company and Officer to contact the bank on your behalf, and to discuss details of your financial and hardship information.
3. Documenting Your Hardship.
4. The Hardship letter is critical to obtaining the lender’s approval for a short sale.
5. The hardship letter needs to explain what happened to you and why you can’t make your payments.
6. The hardship letter must be truthful, forthright, and easy to understand.
7. You should ask for permission for a sort sale from your lender.
8. You should promise to cooperate with your lender and ask the bank to cooperate with your real estate agent,
9. The hardship letter should be ONE PAGE.
10. You will be required to submit a Financial worksheet.
11. A financial worksheet is a simply monthly budget
12. Report current monthly income and from what sources:Report your debts: mortgages, credit cards, car loans, revolving loans, student loans and other fixed expenses.
13. Estimated expenses: household items, clothing, food, religious activities, child care, gas and so forth.
14. Adding up your expenses from your checking account is highly recommended. Remember, the bank will be accurate. (I will supply you with a Financial Worksheet)
The bank may require other documents as well.
1. Last 2 months bank statements,
2. Last 30 days Paystubs, all borrowers. If self employed, typically a 6 month Profit and Loss statement must be supplied.
3. Last 2 years copy of Tax Returns. Typically the bank wants to see form 1040 and all W-2 statements.
I will submit for you
§ Listing Agreement
§ Short Sale Addendum to the Listing Agreement
§ HUD -1 An estimated breakdown of all funds associated with the short sale of your property.
§ The Purchase (offer and Acceptance) Agreement
§ Byers Proof of Loan Approval or Funds
§ Copy of the Buyer’s Earnest Money Check.
§ Your lender will spend some weeks investigating your loan file.
§ They will review the paperwork for completeness and legibility.
§ Contact any PMI company on your loan
§ Contact the entity that owns the note
§ Review your financial situation.
§ Usually there will be little or not contact from the bank during this time.
The negotiator will then contact me to discuss what terms the investor is willing to offer and the negotiations begin!
1. Sales Price
2. Title or Settlement Charges
3. Buyers Closing Costs
4. Relocation Assistance for the Sellers
5. Unpaid HOA Fee’s
6. Unpaid Utility bills
7. Unpaid Insurance premiums
8. Real Estate Commissions
9. Borrowers Cash Contributions or Promissory Note
Deficiency is a term used to describe the money that the investor didn’t get from a short sale or foreclosure.
Deficiencies can be released by the investor during a short sale, thus the borrowers will be issued a 1099 by the bank, and will no longer to responsible for any further financial debt to the lender.
The bank can refuse to release the deficiency during a short sale, thus keeping the option to pursue more money from the borrowers at a future date.
Usually the bank has 6 years from the date of the close of escrow to legally pursue the deficiency.
My Short Sale team has had very good fortune of getting them dismissed entirely!
What happens if the investor refuses to release the deficiency against the borrower there are some options:
§ The investor usually will “sell” the release if the borrower can pay at closing.
§ The borrower can close on the sale and declare bankruptcy if the lender pursues the deficiency, thus wiping out the unsecured debt.
§ If the bank pursues the deficiency, the amount owed can possibly be negotiated for less at that time.
§ If the lender refuses to release the deficiency, there will be nothing that I can do to negotiate it away, short of the borrower bringing in cash at closing to remove it.
§ When a lender accepts a short sale, they are forgiving or cancelling debt.
§ The IRS considers this taxable income.
§ A bill, called “The Mortgage Cancellation Relief Act of 2007” was signed into law Dec. 20, 2007
§ This bill has recently been extended to 2012.
§ This law eliminates any tax liability when the property is the primary residence of the taxpayer.
§ Investment properties and second homes are still liable for taxes based on the amount of mortgage balance cancelled or forgiven.
§ It is vitally important that you consult an expert on tax matters to fully understand the tax consequences to a short sale!
When can you purchase another home?
When? It’s a tough question to answer because many factors come into play and the credit scoring system is proprietary which does not give me a precise answer. How the bank records the short sale, your FICO scores, will determine when you are able to purchase another home.
What will you see on your credit report?
§ Your loan is reported late 46 days from the missed payment
§ Every late payment affects your credit score about 80 points.
§ If you are able to continue making payment during the short sale your FICO scores will never be compromised.
§ When the short sale is completed, the lender will normally report your loan to be “Discounted Pay off, Paid-In-Full, Agreed Settlement Short of Full Pay off” or similar language.
§ A “settled” Debt is far less damaging to your credit report than a Foreclosure.
§ If you have continued to make payments during the short sale your credit scores will not be dramatically affected.
§ If your credit scores have dropped because of missed payments the banks reporting of your debt being settled will stop the downward slide of your credit score.
§ Many homeowners can purchase another house in roughly 2 years from their short sale, but it will be 5-7 years for a foreclosure!
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