Real Estate Short Sale Guide

What are the advantages of a short sale?  Well in today’s market is can serve a big purpose in helping many Americans from avoiding Foreclosure.

Here are a couple of main advantages of a real estate short sale.

Advantage #1 – The damage to your credit can be minimized with a short sale.  Foreclosures can cause longer damage to your credit score.  A short sale will be reported as a “settled debt” and it will preserve your credit more than a foreclosure.  It will also allow you to get into a home faster.

Advantage #2 – You can also  minimize your financial liability since in a foreclosure situation the lender would have to sell the property at a significant discount after they gained control of the property.  In a short sale situation, the homeowner is still somewhat involved in the negotiation process of the sale of the home which can give the homeowner some control of the sales price of the home.  It could reduce the potential associated liabilities.

Here are some general guidelines important to sellers of short sales who are looking to get back into a home again.

FHA loan guidelines are a bit lenient than conventional guidelines:

• Foreclosure/Short Sales only need to wait 3 years after a foreclosure has been completed
• Chapter 7 Bankruptcy only need to wait 2 years after charge off
• Chapter 13 Bankruptcy only need 1 year (everything needs to be paid off)

Conventional Loans will take a longer time to obtain financing at about 4 years.  A credit score of 680 or higher is typically a general rule of thumb to re-establish credit and satisfactory for: foreclosures, bankruptcies and short sales.

Veteran Administration loans (VA) will take up to 2 years after a foreclosure, short sale or bankruptcy.  The borrower will need to provide proof that there is no outstanding debt and credit must be re-established along with an explanation letter.

Some lender may not even allow a mortgage within 7 years if you are applying with the same lender that the foreclosure or short sale happened with.

If selling your home via a short sale with Wells Fargo, here is some helpful information in helping the process become more smooth.

• Wells Fargo Home Mortgage: 1-877-216-8448
• Wells Fargo Fax Number: 1-866-917-1877 and 1-612-312-4951 (expedited number but will still take 5 to 7 business days for response)
• Hours of Operations: Authorizations until 6pm EST, Call Center is open until 10pm EST
• An authorization letter is needed, including a Wells Fargo authorization form.
• There are 2 fax numbers to send your authorization letter (listed above).

What you’ll need to include in your short sale package to Wells Fargo:

• Cover letter with everyone’s contact info & summary of the offer
• Hardship Letter
• Complete offer to purchase contract with all signatures
• Listing agreement with all signatures
• Wells Fargo Financial worksheet with recent bank statements showing income.
• A CMA for the property
• Proof of funds for Cash offers or a pre-approval letter for financed deals
• Proof of hardship (job termination letter, medical bills, etc.)

If a foreclosure is imminent, put that information in the cover letter for the bank to see.

Where to send the package?

1-866-359-7363 is the main document server

Suggestions & Notes:

• Take notes of every conversation with the bank.
• Keep all the fax confirmation sheets
• Call daily and try not to be rude.
• When you call the cell center to ask questions, you may get a different answer every time you call.  It can be frustrating.

Short Sales Sellers need to pass a hardship test with the lender to sell the home via a short sale.  There must be a provable reason why you are not able to keep the house any longer.

Look at your situation and ask yourself these questions:

• Since buying the home, have you lost your job?
• Did you have a bad accident or illness that prevents you from working?
• Do you have large new medical bills that you acquired after buying the home?
• Have you been relocated to another city or state?
• Has your interest rate gone up to a point which makes it hard for you to pay your mortgage?

What is there is no hardship?

If you have taken all the equity out of the house and are now in debt, that is not a hardship.  If you bought your home at the top of the market and it’s worth less now than what you paid, that is not a hardship.

The Asset Test: Do you have any assets?

• Do you have money in CDs or Savings Accounts?
• Do you have stocks or bonds?
• Do you have equity in other properties?

If you have any of these types of assets, the lender will not take all the loss.  They will only accept the short sale if you are contributing as well to the loss.

Selling a property as a short sale can get quite complicating.

1. What is a short sale? A short sale is a process in which a homeowner sells their property for less than what is owed on the outstanding mortgage(s).  This process requires a lot of specific documentation that is gathered early and presented to lenders to convince them to discount the mortgage balance to allow the sale.  If the sale is approved the lender(s), they will take a loss, and will allow the homeowner to get out from under the mortgage.  This process will also stop foreclosure.
2. What are the steps the banks decide on the sale price? Each bank will have a different criteria to review and decide the selling price.
3. Which types of situations benefit most from using a short sale? Short sales are also known as pre-foreclosures.  Typically a homeowner in default at least 3 months or more past due on their mortgage payment.  A homeowner that is past due must demonstrate hardship involving their finances which caused the delinquency.  The hardships will vary, but proof must be rendered before the hardship will be considered.
4. How does a homeowner benefit from a short sale? The homeowner will no longer have a burdensome monthly mortgage payment.  Once the short sale is approved, the foreclosure process stops and can remove anxiety to the homeowner.  From a credit report stance, a short sale will be listed as a “paid settled” account, along with the late payments from the past due mortgage.  The blemishes are supposed to be less bad than a full blown foreclosure on your credit report, which will remain on your public report for up to 10 years.
5. Are short sales offered to investors? Yes, they are but a hardship must be demonstrated.  As an investor, you may have other considerations or implications to consider.  Make sure to seek advice regarding tax consequences from your tax adviser or CPA.
6. Are certain loan types considered over other with short sales? Maybe.  Although, there may be other implications, which can pose a risk such as a deficiency judgment, or lawsuit or mortgage contract, which differ from a judicial foreclosure.
7. I have a FHA, VA or other government back loan, does it matter? Every loan type has different characteristics banks look at – thus a short sale may be possible.
8. Why is financial hardship important? The lender will not agree to sell the home for less, unless there is a good reason. Lenders want to lose the least amount of money considering a foreclosure and lenders can expect to lose up to 40% of the amount of the mortgage if they go through the foreclosure process.  Thus, it makes sense to have someone willing to buy the home for less than it is owed – they will gain more than through a foreclosure sale.  If you are current on  your mortgage payment, it is nearly impossible to short sale your home.  Lenders need to see that you cannot pay your mortgage before they agree to allowing you to do a short sale.
9. When the short sale is completed, who owns the home? Just like a regular home sale, the buyer will own the “short sale” home.  The loans are paid and satisfied, the previous owner moves out and the new owner moves in.
10. How does a short sale affect past due property taxes? Property taxes are the responsibility of the homeowner up until the close of the escrow.  If your property taxes have not been paid, this fact will affect the negotiation of the short sales since the lender will have to pay those off to transfer title.
    
11. With a short sale, who is responsible for the sales commission? The commission is typically paid by the funds but since there is no equity, the lender ends up paying the entire real estate sales commission.
12. Are there guarantees a short sale will work? No, there are no guarantees in a short sale.  Banks and lenders need to be convinced that the property value is proper and all the requested paperwork is submitted in perfect order.  It may weeks or months before the lender gives a reply to only deny the request of short sale.  When that is done, the purchase contract is no longer valid and the short sale listing continues on the market.
13. How long does it take for a short sale to complete? A short sale can take a few weeks to a few months to complete.
14. I have multiple loans on my home, including my first and two 2nd, can I do a short sale? Yes, each mortgage or home equity loan or line of credit can be negotiated individually.

A short sale is when a lender agrees to accept less than what is owed on a mortgage.

The benefits to the seller of the a short sale property is that they avoid foreclosure by selling their home before a foreclosure auction.

The lenders also benefit, because they can get the bad debt off their books.  If a lender has delinquent loans on their books, it will affect how much money they can lend out in new loans because they are regulated by the FDIC.  The more bad loans they can get rid of, the more good loans they can acquire.  In addition, the lenders will lose 35-50 thousand dollars and it will be a huge cost saver to short sale the home instead of foreclosing on the property.

In addition, the home buyers benefits by getting a home at a lower price.

The real estate investors also can win out, because in today’s market they are getting a lot of listings with no equity but can turn the “weak” leads into strong commission, of course if they have a good background in short sales.

Who is responsible for writing a hardship letter to the lender?

It’s the homeowners responsibility to write the letter or obtain help from a real estate investor if one is involved.  The real estate investor can offer valuable experience and samples of hardship letters for homeowners to write a letter.

The hardship letter should be personal and give the homeowner a chance to get a lender to accept the smaller amount from the short sale.  A well written hardship letter is moving and personal, but also includes complete backup of the proofs of that hardship.  The best hardship letter will convince the creditors that the homeowner’s situation is genuinely distressing and the lender would be better off accepting the smaller amount than pursuing a foreclosure.

The hardship letter is quite important to the short sale package delivered to the lender. So, to receive an approval from the lender, the letter must be compelling and very descriptive at explaining why the borrower has defaulted on their loan. The borrower will need to give dates, reasons and really make an attempt to play with emotions.

Here are a few reasons WHY a borrower may default on a loan:

The bank will ask if the problem is temporary or something with lasting effects. If something appears to be a permanent situation, the bank will look at it from that perspective.

Keep the letter under 2 pages and ideally only on 1 page. It’s also a good idea to have the homeowner hand write the letter and sign it at the bottom. Write a kind, courteous letter with some compassion as an actual human will be reading the letter and may have a part in the decision making.

Sample Hardship Letter

If you are doing a short sale, here is an example of a hardship letter that you would send to the lender when having your home considered to be a short sale.

Date

Lender Name
Address
Loan Number

Re: Hardship

Dear Sirs,

Our names are (insert names) and I’ve/we’ve been paying the mortgage on our home at (insert address) for (insert number of years) years now.  We have done everything in our power to make ends meet but unfortunately have fallen short and would like for you to consider working us to modify our loan.  Our number one goal is to keep our home and would appreciate the opportunity to do that.

Explain your hardship (include dates and specific incidents that caused you to get behind and explain how it could be resolved.  A hardship can include: Adjustable rate mortgage reset shock, illness, loss of job, reduced income, failed business, job relocation, death of spouse or co-borrower, incarceration, divorce, death, military duty, marital separation, reduced income, medical bills or damage to property via a natural disaster)

(Explain what steps you’ve taken to correct you financial position to cut back on spending, canceled spending – like cable and if you’ve met with a Credit Counselor).

We would appreciate if you could work with us to lower the delinquent amount owed and/or payments so that we can keep our home.

We truly hope that you will consider working with us and are anxious to get this settled.

Sincerely and Respectfully,

Borrower(s) Signatures