Real Estate Short Sale Guide

More lenders are allowing borrowers to sell their home via a short sale transaction. The property is sold for less than what is owed and lengthy task for any seller and buyer to endure due to the lender bearing greatest monetary loss.

Banks and Short Sales:

Short sales have jumped in numbers since last year and continue to rise across the country. In response for the greater short sales requests, Bank of America has adjusted their dealing by opening up a short sale call center. The bank is also hoping to launch a pilot program within 30 days that would shrink the short sale process to one week of time to have a short sale approved. Prospective sellers would apply to Bank or America to get preapproved to pursue a short sale, then will go back to the bank once a short sale offer is on the table.

Wells Fargo has begun streamlining its short sale process last year by reducing the days required to finish a short sale from 90 days to 30 days. Wells Fargo found there were a lot of things they could do ahead of time to make the decision faster when an offer was submitted to the bank. Borrowers are now encouraged to contact the bank or lender as soon as possible to assess whether the property can qualify for a short sale. The bank or lender will also help assist them in setting a proper listing price.

Banks are willing to negotiate on short sales but are not willing to accept below market pricing. Don’t expect a lender to accept every lowball offer. Most banks are willing to aaccept a write down on property of about 10 percent from the current value – so they probably won’t accept 20 or 30 percent off of market value.

But even after an offer is accepted by the seller, the short sale timeline can quite lengthy. Each lender has their own rules and each vary on how long it takes to approve the transaction. You must be patient and prepared to give the lender some time to review the case. Be prepared to contact the lender frequently.

When your home value falls, especially over 20%, you might be tempted to letting the house go into foreclosure or attempt to work out a short sale agreement with your bank.

Realize that even giving up your current home and paying less for a future home can cost even more than just money. You can be putting your finances into a riskier situation. Both foreclosures and short sales involve you giving away or selling your home in a non-traditional matter. A foreclosure involves the bank repossessing your home due to missed mortgage payments and a short sale is when you sell your home at less than what is owed on the mortgage due to missed payments and your inability to keep up with making those payments.

Credit Implications
Your FICO score will get a hit by over 100 points due to a foreclosure. Short sales even have an effect on credit, if the sale was reported: “settled for less than what was owed”. Your credit report will tell credit card companies to consider rate hikes, credit limit decreases and insurance companies to raise your premiums.

Timeline To Buy Another Home
The time frame to purchase another home after a foreclosure or short sale differs from each lender, but FHA loans will typically require a 3 year waiting period for both situations. However, the waiting period is evaluated on a case-by-case basis. If the short sale was a result of significant decline in value, the homeowner was making their payments on time and the sale was needed for a job relocation – this would be an exception to rule.

Of course, the lender will evaluate how you’ve handled your bills since the foreclosure or short sale. In addition, renting may be difficult immediately following a foreclosure or short sale as many landlords or apartment complexes will check your credit report.

Employment and Credit Rating

For future employers who check credit rating, they will see that your home has been foreclosed upon or sold short and it may affect their hiring decision. You may be disqualified for the position or have to explain why you decided to leave your home.

Uncertainty of Rising Home Values
No one is sure on what home prices will look 2 to 3 years down the line. If you leave your home, you are left with an uncertainty of future interest rates and home prices. A new house may cost more or interest rates may be higher.

Other options
Try adjusting your expenses to avoid foreclosure or a short sale if you do not want to lose your home. Or you can check with your bank or lender for a loan modification to lower your monthly mortgage payments.

Countrywide will be implementing a new online interface to help Realtors with the short sale processing and streamline sales sometime in June 2009. The interface is expected to help Realtors by allowing them to upload and update information while at the same time communicate with Countrywide negotiators and receive updates during the short sale process. The new system will be exciting for Realtors as it will give them another way to answer any requests from Countrywide negotiators without having to wait for faxed items to enter their banking system.

Many agree that the short sale process has proved to be cumbersome with wait times ranging from 2 weeks to 2 months to hear an answer on a purchase agreement or get a short sale approval. Since Countrywide’s short sale approvals are buyer-specific, you are not able to transfer one approval for price and terms to another buyer.

Short sale approvals can take quite some time, especially if there is more than one mortgage holder which then extends the processing time for approval. In addition, each real estate short sale is subject to a fraud review and asset search to make sure the current property owners truly don’t have sufficient resources to absorb.

Short sales involve the lender agreeing to accept less than what is owed on the mortgage and allow the borrower to escape foreclosure, while retaining a small amount of control over the process, such as their move-out date.

By providing a complete short sale package, the borrower can minimize short sale processing time and hopefully get a quick response from the bank. The bank will want to see that the house is listed for sale on the open market.

As for now, here is a contact number to get a hold of Countrywide:

HOME RETENTION DEPARTMENT
800-262-4218
SHORT SALE DEPARTMENT

More and more mortgage lenders are realizing that short sales are the way to go to avoid high costs in foreclosing properties.

In today’s market lenders are realizing that they are losing more when going through the foreclosure process due to the high costs in filing documents in court, sending notices, selling through auctions or foreclosure listings, the time taken to foreclose on the house (especially if the homeowner uses legal measures to delay the process and allows them to stay in the property longer for free).

Once a mortgage lender has agreed to a short sale, they will agree to accept a full payment that is lower than the mortgage balance. They will take a loss, but it will be lower than if a foreclosure took place.

According to Fair Issac Corp, handler of the FICO credit score, a short sale will damage your credit score but not as much as a foreclosure.

Short sales have soared across the country by as much as 20 percent in the last 6 months. With some banks, like Wells Fargo, short sales have tripled in the last 18 months.

Short sale time lines with any lender can vary greatly from as short as two weeks to longer periods exceeding 2 to 3 months to receive a response on the initial offer. Typically, when the bank responds, lenders like Countrywide will counter with either a higher price or change/modify demands made in the initial purchase offer.

Currently to muck up the short sale already long time line, Countrywide has a new short sale approval letter. It now attempts to retain the right to invalidate a “transaction for events which may have occurred at the loan’s inception or in transaction”.

The condition reads as follows:

“If the property was acquired by any means of fraud, [lender’s name] reserves the right to pursue any and all actions available to it to pursue any and all actions available to it to offset its losses. If it is determined that Sellers and/or Buyers participated in any way to the fraud, this short sale will be void, and the Note and Security Instrument will remain in full force and effect.”

The title insurance will not be issued to the buyer or the buyer’s lender if Countrywide can say after the close of escrow that the money is still due. Due to this issue, and the fact that there is no workaround to this provision, anyone who receives this approval letter from Countrywide will need to advise them that the condition must be remove, in writing, or the short sale cannot close.

Don’t be surprised if more lenders try to add these conditions in lender’s agreements. If there is any type of provision like this one, which allows the lender the right to refuse reconveyance after the close of escrow, do not close without legal approval.

Most importantly, get a good title company to handle the short sale and consult an attorney and/or experienced short sale Realtor when going through a short sale.

As far as GMAC, it appears they have quite the list of rules for short sales:
1) Full financial short sale package is sent from the borrower
2) Typically Maximum commission to real estate agents is 4%
3) GMAC will only accept shorts sales within 90 to 100% of fair market value of the property
4) There will be no closing cost credits to the buyer
5) GMAC will typically decline low offers.
6) GMAC will require that you use their Authorization to Release Information to be signed and notarized. The original is to be sent back.

Short sales are quite common in this real estate market due to the number of properties losing their property value in this slumping housing market. It’s estimated by the National Association of Realtors that forty percent of homes sold today are in distressed situations and are being sold as either a short sale (pre-foreclosure) or foreclosure property.

Lenders do not like to change the terms of the loan, but they would rather change terms than take a loss on it. But in today’s market, many homeowners still cannot hold onto their homes even after terms are changed due to hardships or strict restrictions on obtaining a change in terms to their loan(s).

If a home has more than one loan, it can throw a curve ball in a short sale situation due to the amount of time and parties required to approve the deal. Multiple parties will need to agree on the total loss and mortgage insurers and home equity lenders may also need to get involved in the short sale process. To successfully prove a sale, the seller will need to support their claim of financial hardship with a letter, pay stubs and/or bank statements.

Even when a lender has agreed to do a short sale, the lender has every right to request the homeowner to make future payments on the difference owed – although the homeowner doesn’t have to agree. The up side, is that no taxes are owed on the differences due to the Mortgage Forgiveness Debt Relief Act. Although, this act does not protect 2nd homes or investment properties.

As far as your credit score, a short sale will appear on your credit report and will damage your score to a degree. You will have to pay higher interest rates for borrowing down the loan, but the impact on your overall credit score will not be as damaging as a foreclosure or bankruptcy would have.

If you are the buyer, be prepared to wait…patiently. Short sales are not short at all and a short sale buyer needs to be able to wait at least 3 months for an approval from the lender. Trying to apply pressure on the bank may not work as they will take their time due to the overwhelming numbers of short sale requests in the pipeline. A buyer can speed up a decision if they can offer to pay in cash or make an offer that is equal to at least 90% of what the broker thinks the home is worth in today’s current real estate market.

Doing a short sale can vary on experience from lender to lender. Each one will have their own short sale process or time line. Here are a few tips when dealing with these top 3 mortgage lenders.

A typical short sale decision can take 30-60 days from the date the offer is received. Several factors contribute to this time frame:

Countrywide Short Sales

A pending short sale with Countrywide can take quite time and can get messy if you don’t have all your ducks in a row. Some important tips when dealing with Countrywide:

Wells Fargo Short Sales

Washington Mutual (WaMu) Short Sales

Overall Short Sale Process

A short sale will not be approved until an offer is received. A short sale approval or rejection can take 30 to 60 days from the date it is offered.

Day 1 – A short sale offer is submitted to the short sale lender, including the short sale package: hardship letter, MLS listing, preliminary HUD-1 from the title company, signed purchase agreement, listing agreement
Day 2 to 30 – An Appraisal/BPO is ordered
Day 31 to 45 – Negotiations begin, if any, between the seller’s lender and the buyer. Insurers (FHA, VA, MI companies) and investors like Fannie Mae and Freddie Mac will need to approve the short sale before it can go forward. Any other lenders on the property have to agree to accept an agreed payoff amount to release the lien.
Day 46-51 – Approve or Decline the offer.
Day 52-82 – Proceed with the sale until closing