(HELP #1) What is a short sale process?
(HELP #2) Why do mortgage lenders accept short sales?
(HELP #3) How long is the mortgage short sale process?
(HELP #4) Why homeowners should do a mortgage short sale?
(HELP #5) Items your mortgage lender will process
(HELP #6) Items your mortgage lender will pay
(HELP #7) How we handle Loss Mitigation Departments?
(HELP #8) Common short sale process mistakes
(HELP #9) Broker’s Price Opinion, or BPO
(HELP #10) How we handle the negotiation process
(HELP #11) Can offers be rejected?
(HELP #12) Do mortgage short sales really work (also see legal implications)?
(HELP #13) Beware of the non-purchase money second mortgage
(HELP #14) Legal implications of the process Read a blog post comparing short sale and roulette. WHAT IS A SHORT SALE PROCESS (HELP #1) How to understand the process: a mortgage short sale is an arrangement between the homeowners and the mortgage lender(s). A short sale occurs when the mortgage lender or investor accepts less money than owed and considers the debt “paid in full,” thereby permitting the sale to occur. The difference between the amount owed and what the mortgage lender collects on the short sale is known as the deficiency. Mortgage lenders in other states have tried to obtain judgments for the mortgage short sale deficiency and others have forgiven it. Fortunately, Arizona is an anti-deficiency state which will help to preserve your financial health after the short sale process. See legal implications of the short sale process. Note that the word “mortgage” is used in this information but “deed of trusts” are used in Arizona. WHY DO MORTGAGE LENDERS ACCEPT SHORT SALES? (HELP #2) - The mortgage is in arrears
- Property condition is poor
- To help a homeowner with hardships defaulting on a mortgage
- The area or neighborhood has depreciated
- The mortgage lender’s shareholders are concerned with excessive defaulting mortgages; By accepting the mortgage short sale process, the mortgage lender can help themselves by avoiding a lengthy, costly foreclosure process. A foreclosure results in the mortgage lender owning the property (known as real estate owned or REO). REO’s are a liability, not an asset; too many liabilities will cause any business problems
HOW LONG IS THE MORTGAGE SHORT SALE PROCESS? (HELP #3) How long will the process take? This is a complicated question that depends on both the homeowner’s and mortgage lender’s situations. The first consideration during the short sale process is whether the homeowner has received a Notice of Default (NOD). NOD’s are sent to homeowners 90 days after missing their first mortgage payment. This process ends with the house being sold at a Trustee’s Sale 90 days after the homeowner receives a NOD (unless payments are made). Mortgage lenders can delay the mortgage foreclosure process if the homeowner has a valid contract for sale on the home. Average short sales can be anywhere from a 2-6 month process from the time of the accepted purchase contract. It is unclear why or how the mortgage short sale process takes that long, but the most common answers seem to be:  increasing numbers of short sales are keeping mortgage lenders very busy- mortgage lenders who are already losing money are unlikely to hire additional help to process short sales
A short sale can be processed in less time, but is dependent on the mortgage lender and how quickly they respond and process it. It’s definitely important to get the mortgage lender all short sale information they require. As short sale process specialists we constantly follow up and help the mortgage lender process the file. WHY HOMEOWNERS SHOULD DO A MORTGAGE SHORT SALE (HELP #4) A short sale will be reported as “loan paid NOT as agreed” on a credit report. The number of 30, 60, and 90 day late mortgage payments before the loan payoff does not help and can be more damaging than the short sale process. The foreclosure process will affect the homeowner’s credit report for between 7-10 years. A Deed in Lieu of Foreclosure (owner signs the house over to mortgage lender to avoid the foreclosure process) has less of an effect on their credit then a foreclosure. However, the mortgage short sale has the least affect on their credit. To summarize: - Foreclosure process (most effect on credit)
- Deed in Lieu (less effect than foreclosure)
- Short Sale process (most help preserving credit)
 Many homeowners who participated in a short sale process were able to purchase another home within 2-4 years, depending on other credit issues. Additional benefits of a short sale to the owner include:
- helping get the short sale home sold and mortgage paid off
- mortgage lender accepting a discounted payoff from the short sale
- no out-of-pocket cost for the short sale process to the owner (mortgage holder will help pay all short sale costs)
- no worry about house and mortgage after the short sale
ITEMS YOUR MORTGAGE LENDER WILL PROCESS
(HELP #5)
Here is a list of items needed by most mortgage lenders to help complete the process:
- Letter of authorization allowing us to help process the short sale on your behalf
- Hardship letter to inform how you have been affected by:
o Family illness or injury
o Job relocation
o Job loss or significant income loss
o Divorce or split of domestic partners
o Adjustment in mortgage payment or unforeseen increase in living expenses
o Anything else life can throw at a person - 2 months pay stubs for each homeowner on the loan
- 2 months bank statements, all pages, for all accounts
- 2 years tax returns
- Comparative Market Analysis
- Listing agreement
- Short sale purchase contract and all counter offers
- Buyer’s LSR (loan status report) for the short sale process to show prequalification for purchasing the property
- Short sale settlement statement from the title company showing how the mortgage lender’s net proceeds are affected after all short sale costs are paid
ITEMS YOUR MORTGAGE LENDER WILL PAY
(HELP #6)
The lender(s) will usually pay for the following costs associated with the mortgage short sale process:
- Escrow fee (homeowner’s half)
- Owner’s title policy
- Recording fee’s
- Short sale reconveyance fee
- Overnight mailing fee for the payoff
- Real estate property taxes and prorations
- Real estate commissions
- HOA dues and fee’s
If the HOA has placed a lien on the property, some mortgage lenders may allow $1,000 to be paid towards this lien to complete the short sale. We will negotiate with the HOA to reduce their fee’s and accept this money as payment in full. We will help remind the HOA they will receive nothing if this home goes to the foreclosure process and is sold at the trustee's sale! The short sale process will help them! Mortgage lender will NOT pay for the following short sale costs (see NOTE below the list): - “buyer” closing and mortgage costs
- home warranty
- buyer’s appraisal
- buyer’s inspection
- any repairs to the short sale
NOTE: as of 2008 short sale process rules have changed. How? Mortgage lenders are now generally willing to help pay for the first two items on this list. Mortgage lenders are now more willing to negotiate details regarding a short sale. The bottom line is: if the mortgage lender wants the property off their books they will negotiate the short sale! Ask us how any recent changes can help the short sale process.
HOW WE HANDLE LOSS MITIGATION DEPARTMENTS
(HELP #7) We will call the Loss Mitigation Department at the mortgage company and ask how long the short sale approval process will take once a complete short sale package is received. We fax all the short sale information discussed above. We include a fax cover page stating "this is a NEW SHORT SALE PACKAGE." We also request that they process an interior BPO, or Broker Price Opinion (this is an advanced form of a comparable market sales report). The more complete the short sale package, the greater the homeowners chance for success in the process. The Loss Mitigation Department will be more willing to help us. There is only ONE opportunity to impress the mortgage lender with a strong, complete, and well organized short sale package! It's important that we do this process correctly the first time.  Once we have sent in your short sale package there is usually a one week wait before calling the mortgage lender to learn which loss mitigation specialist is handling the file. The Loss Mitigation Department at the mortgage lender is busy -- if not highly overworked. Loss mitigators usually each have between 80-300 short sale files on their desk to process at one time. The loss mitigation specialist will be our contact for the duration of the short sale process. Our goal is to help the lenders short sale mitigator to work with us. How? We provide as much short sale information as possible. This will help them with the short sale process and will ultimately help the homeowner. We show the short sale mitigator our expertise by sending them a complete mortgage short sale package and by being organized. We let them know we understand how busy they are with short sales and appreciate the valuable time they are spending to help the homeowner’s short sale process.
COMMON SHORT SALE PROCESS MISTAKES (HELP #8)  3 common mortgage short sale process mistakes
- Sending in a low-ball short sale offer that we know the mortgage lender will not accept.
- Unfamiliarity with the short sale process. Mortgage lenders are busy and don’t have time to explain the short sale process. We show them how we know the process.
- Not determining the intentions of a second mortgage lender, if one exists. Second mortgage lenders have the right to disapprove the short sale so we work quickly to learn their requirements.
BROKERS PRICE OPINION, or BPO (HELP #9)  The most important fact the mortgage lender needs to know is how much the short sale property is worth? Most mortgage lenders hire a real estate agent/broker to help evaluate the short sale property. This evaluation is called the broker’s price opinion or BPO. The BPO is one of the largest hurdles to clear when completing the short sale process. Our goal -- after submitting your initial package to the mortgage lender -- is to get them to order this evaluation and provide additional comparable sales to insure it is accurate.
The agent/broker will call to set an appointment to complete the short sale BPO. We meet the agent at the home and develop rapport. We share how comparable sales and other factors affect the properties value. If handled correctly, some agents will actually disclose the price they submit to the mortgage lender. This is a huge help because most mortgage lenders will not disclose the ACTUAL amount of the BPO. They want to get the most money for their mortgage investor. HOW WE HANDLE THE NEGOTIATION PROCESS (HELP #10) Here are some highlights that help negotiate a short sale process. Every mortgage lender and negotiator has a different approach when it comes to handling the short sale process: - We are patient, yet persistent and helpful with the mortgage lender on the short sale
- We reinforce to the mortgage lender how a short sale helps save many costs associated with the foreclosure process: attorney’s fees, eviction procedure, delays from borrower's bankruptcy, damages to property, etc
- We work to convince the mortgage lender how it's in their best interest to approve the short sale by accepting less money now
- If the mortgage lender responds with a higher short sale counter offer, we ask open-ended questions regarding their opinion of the validity of the short sale BPO to draw out more information
- We ask if they agree with the agent’s assessment and how it was obtained
- We expect a mortgage lender will accept between $10,000-$20,000 less for the short sale than stated
CAN OFFERS BE REJECTED? (HELP #11) This is a familiar process: The mortgage lender receives the short sale BPO from the agent. It's higher than the offered sales price, so the loss mitigator requests that the contract price be increased. If this happens we: - send back a "counter-to-the-counter" with the original offer price; we send additional comparable property information to prove why the mortgage lender should accept the original offer
- send pictures of the neighborhood
- send copies of newspaper articles with “bad housing news”
- send a bid for repair estimates
We ask the following questions regarding the short sale BPO if the mortgage lender still thinks the short sale property is worth more: - Are the comps an acceptable distance from the short sale property?
- Are the comps of comparable size?
- Does the square footage of the BPO match the original appraisal?
- What is the interior condition?
- How much allowance is given for the deferred maintenance?
- How high is the crime rate in the area?
These questions can help figure out if the agent did a good or bad short sale BPO. Then we can submit more information to the mortgage lender to prove their BPO is incorrect. As a last resort, we can ask the mortgage lender if they will accept an independent FULL APPRAISAL for review. Remember that the mortgage lender wants to avoid the process of the buyer filing bankruptcy. They also desire to unload unwanted property without taking a huge loss. We will always keep trying to help the short sale. DO MORTGAGE SHORT SALES REALLY WORK (ALSO SEE LEGAL IMPLICATIONS) (HELP #12)  We sometimes hear people say how the short sale process isn’t worth the time and rarely works. That is not our overall experience and we have several practices to help ensure a successful process.
First, we prescreen all short sale information. This means collecting and reviewing the homeowner financials (including Hardship Letter) so there are no surprises in the process (like $20,000 sitting in the homeowner’s bank account). This also includes going over ramifications of the short sale process with the homeowner (i.e. possibility of a 1099C, a soft note on the 2nd and that any liens on the property will need to be paid). For example, if a homeowner has a home equity line of credit the mortgage lender will most likely ask for a “soft note” (loan for a portion of the balance with easy terms) to proceed with the short sale (more in HELP #13). It’s a big help to know upfront if the homeowner absolutely refuses to comply with such a short sale condition. Second, we consistently follow up and nudge the mortgage lender(s) to move forward for a successful short sale process. We know lenders move slow with short sales, but when we find a short sale package has “disappeared” we move quickly and replace whatever they lost in the process. Consistent follow up is important when the short sale process is not moving forward in a timely manner with the mortgage lender(s). Utilizing these practices will guarantee a much higher short sale success rate. We can attest to that! BEWARE OF THE NON-PURCHASE MONEY SECOND MORTGAGE (HELP #13) If you decide to pursue a real estate short sale, be aware of the "non-purchase money" 2nd mortgage. A non-purchase money mortgage is one used for more than the purchase of the house. For example, a HELOC ( home equity line of credit) is a non-purchase money second mortgage. A HELOC may have been used to consolidate debt, take a vacation, or buy a new boat/car. In other words, the loan was for more than the house. In contrast, a purchase money second mortgage was taken out at the time of purchase process and used exclusively to buy the house. Lenders holding the note for a HELOC are less likely to let the homeowner walk from the short sale process without repaying a portion of the loan. They know the homeowner will still enjoy the benefits of their debt consolidation, vacation, or new boat/car long after they sell their home on a short sale. Therefore, they feel the homeowner should take more financial responsibility. How? By signing a promissory note for up to one half of the second mortgage. Many times these promissory notes will be "zero" interest loans for up to 15 years to help the homeowner complete the short sale process. Here’s the real problem: if short sale homework is not done up front to determine the intentions of the non-purchase money second mortgage lender and homeowner, we could find a short sale buyer only to learn the second mortgage requires a large promissory note. If the homeowner refuses to sign it the second mortgage holder will not sign off on the short sale process and the house will go to the trustee's sale. LEGAL IMPLICATIONS (HELP #14)  Consult an attorney/accountant for longer-term effects before completing a mortgage short sale. Although we are experienced short sale experts, we are not qualified to give legal or tax help associated with the process.
The IRS formerly considered debt forgiveness as income. However, legislation (October 2007) has reversed that rule. Additionally, ARS 33-729 and ARS 33-814 protect a homeowner from a mortgage lender deficiency if: - the property is less than 2.5 acres
- it is a 1-2 unit dwelling (dwelling means someone lived in the property)
- “purchase money” was used in the mortgage process
- the property is sold at the trustee’s sale
Additionally, the IRS will not collect the ‘forgiveness’ tax if ANY condition applies during the year the forgiveness occurred (The Mortgage Forgiveness Debt Relief Act and Debt Cancellation 2007): - it was the homeowner's primary residence for two of the last five years and “purchase money” was used
- the homeowner can prove insolvency (more debt than assets)
- the homeowner completed bankruptcy (and debt was discharged)
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