Short Sales: Frequently Asked Questions
by Jennifer Tremaine, Tremaine Real Living
What is a Short Sale?
A Short Sale occurs when your bank, lender or mortgage company agrees to accept less than what you owe on your mortgage as full payment (the short) in exchange for a promise by a pre-qualified buyer to purchase it immediately at that lower price (the sale).
A Short Sale is not a foreclosure. You may qualify for a Short Sale even if you are not in danger of foreclosure, and even if you are not late on your payments.
Lenders will often accept a Short Sale because the alternative - foreclosure - can even be more costly to them. During a foreclosure, they must wait a minimum of 12 months after you quit making payments to evict you (Michigan Law). After the house is empty, they must pay for ongoing maintenance (mowing, plowing, boarding, utilities, vandalism) to keep it from losing value. Eventually, they will sell it at a loss as an REO property at auction. If they sue you for the balance due, they risk the likelyhood you will declare bankruptcy and avoid repayment anyway.
How will a Short Sale affect my credit?
FICO® experts agree that a Short Sale on your credit report, like a foreclosure, is very damaging to your credit score.
However, a Short Sale or foreclosure is only one line item on a typical credit report. Your home loan lender also reports missing monthly payments to the major credit reporting agencies. Several missed payments can be just as bad for your score as the final foreclosure or Short Sale.
The advantage of a Short Sale is that in many cases you will not have to miss a payment. This will minimize the impact of the Short sale on your total score. In addition, a Short Sale takes less time to complete than a foreclosure, so you can start rebuilding your credit sooner. Finally, it is generally agreed in the credit reporting industry that the term "Short Sale" simply looks better on a credit report than the term "foreclosure".
To preserve as much of your credit as possible, do not miss any payments or make any large purchases on credit unless you talk to me first.
How long does the Short Sale process take?
From the time you list your home with me until the time it sells varies by neighborhood and by the price asked, but should be approximately 30-60 days. From the time you receive an offer to the time you receive an approval letter from your lender usually takes 3-4 months.
Short Sales tend to take much longer than traditional sales because in virtually every case, your lender, bank or mortgage company collects your Short Sale documents, but they no longer own your mortgage. Their actual title is "loan originator". Back when you bought (or refinanced) your home they collected your information, processed your mortgage paperwork, and then sold your mortgage to another bank or holding company like Fanny Mae, Freddie Mac, FHA or the VA. These actual owners of your mortgage are the ones who will ultimately decide whether you quality for a Short Sale.
Your Short Sale paperwork will start with you, then be transferred to me (your Realtor), then to the loan originator, then to the holder of your mortgage. All decisions come back in the opposite order. Even something as simple as not including your middle name on a document can require new paperwork. This is why Short Sales take so long, and why you should start the Short Sale process before you miss any mortgage payments.
How do I know if I qualify for a Short Sale?
You will not know if you qualify for a Short Sale until you have filled out and provided me with all your documentation. I will then see if you qualify for the HAFA program. If you do not qualify for HAFA, we must wait for an offer or a Purchase Agreement on your home to show your lender(s). Without an offer, they will have nothing to approve.
How is a Short Sale Different from HAFA?
The Home Affordable Foreclosure Alternatives (HAFA) program is a streamlined Short Sale process developed by the Federal Government to give qualified homeowners a way to settle their mortgage debt without the threat of a possible foreclosure. If you fall under the HAFA guidelines, you may be pre-approved for a Short Sale before an offer is ever made on your home. Lenders who are
part of the HAFA program agree not to ask for cash at closing, and will not pursue you for a deficiency judgment. In addition, HAFA Short Sale
homeowners receive $3,000 in relocation assistance (not considered cash at closing).
Once I have all your documentation, I will work with your lender(s) to see if you qualify for the HAFA program.
If you are a deployed wounded, ill, or injured soldier - or a surviving spouse - you may qualify under the Military VA Short Sale program.
Do I have to pay any fees?
If you do not qualify for HAFA, your lender(s) will normally ask you to pay cash at closing in exchange for the Short Sale. The amount will be based on the information you gave them in your financial statement. You can choose to accept, counter-offer, or decline your lender's offer, with the understanding that they may in turn rescind the Short Sale offer. I will help you negotiate with your lender(s).
Why do I need a Realtor?
Successful Short Sales require an experienced Short Sale Realtor. You cannot Short Sale your home on your own, or when it is for sale by owner.
I verify all your paperwork is correct before submitting it to your lender(s), then negotiate with them on your behalf. I will also market your home to get an offer as quickly as possible in order to complete the Short Sale process.
What will your Realtor’s commission be?
The commission is determined by your lender, paid by your lender and is non-negotiable.
What do I do when I get an offer?
Once I have all your documentation, you do nothing. I will contact a title company and have a settlement statement (called a HUD in the industry) drafted. A HUD details what your lender will receive after all fees have been paid. Second, I will submit the offer, the HUD, and your hardship package (financial documents and hardship letter) to your lender(s).
What is a Hardship Package?
This consists of 5 financial documents that should show the lender(s) why your situation has changed such that you should be considered for a Short Sale. They include:
1. Hardship letter – stating how and why you are in a short sale situationThese 5 documents are included in the 16 documents you must provide me in order to begin the Short Sale process.
2. Financial P&L – lists of all your monthly income and outgo
3. Last two pay stubs - or proof of income or unemployment
4. Last two month’s bank statements
5. Last two year’s tax returns
What happens after the offer and documentation is submitted?
After the documents are submitted, your file is assigned to a negotiator. The negotiator does NOT have the final decision, but will prepare a recommendation and Broker’s Price Opinion (BPO) for the investor (Fanny Mae or Freddy Mac) and your PMI (private mortgage insurance) company.
What is a BPO?
It is similar to an appraisal, except it is performed by a Realtor knowledgeable about local real estate. It is his or her recommendation based on the values of similar homes (called "comps") in your neighborhood. Your lender chooses the Realtor to do the BPO from an unrelated real estate company so that it is a fair value of your home.
Who makes the final decision on my Short Sale?
After the BPO is complete, your file will be reviewed by Fanny Mae, Freddy Mac, FHA, VA and your PMI company.
How will I know if my Short Sale has been approved?
The negotiator will send an approval letter to me. The letter will outline all the terms and conditions of the Short Sale. If you are approved it will give a list of terms and conditions that must be met in order for you to be released from your lien.
What happens if I cannot meet the terms of the approval letter?
If the Buyer does not have financing in place, or if the closing does not happen by the date specified in the approval letter, the Short Sale may fail. Extensions are rare, and usually involve fines and penalties to the Buyer and Seller that can be as high as 10% per day.
I have both a 1st and a 2nd lien on my home. How does this change things?
Multiple liens mean that all the steps in the process must be done twice. For example, a hardship package must be sent to all your lenders. To work, the first lien holder must pay off the second lien. I will have to coordinate the delicate timing. The first lien holder will not usually sign off until the second lien holder has done so, and the second will not sign off without the first - neither one wants to go first. It takes an experienced Realtor to properly execute a Short Sale on your behalf.
Who will be at the closing?
You, me, the buyer and their Realtor. The lenders are not present – money is wired directly between them.
Will I get any money at the closing?
No, one of the conditions of a Short Sale is that the Seller will receive no funds at closing.
After the first month I miss a payment, how long do I have before my home is foreclosed?
In Michigan you have 6 months to catch up your payments and stop the foreclosure. Then you have an additional 6 months - called the redemption period - to pay off your entire mortgage (not just catch up) to stop the foreclosure process. Property that has 3 or more acres qualifies as farmland, and has a redemption period of 12 months.
How do I know when I have reached the “point of no return”?
After 6 months of missed payments, the Redemption Period begins with the Sheriff’s Sale.
A Sheriff’s Sale sounds scary – does a Sheriff actually come to my house?
No, but a person called a Server will. The Server will post a large notice on your door that notifies you that your property is formally subject to a Sheriff’s Sale and the date of the sale.
What do I do after the Server arrives?
Don’t be afraid of the Server. Simply remove the notice from your door, call me immediately with the information, then retain the notice for your records. Note that once you have a notice of a Sheriff’s Sale, you may have a foreclosure on your record, even though I still have six months left to Short Sale your home (12 months for farmland). At this point, if your home isn’t being shown regularly I'll start dropping the price even more aggressively until we have an offer.
I am trying to Short Sell my house, but haven’t had very many showings?
We need to drop the price. One showing per week is average. Lenders are reluctant to approve a Short Sale during the last 60 days of the redemption period, so time is critical.
When I receive an offer, should I sign it and consider my home's sale pending?
Yes. Once you sign an offer, your home is listed as pending and will be removed from the MLS and open market. You will not have any more showings. That is why you need an experienced Realtor to advise you and weigh each of these conditions to secure a successful Short Sale.
Remember, there are NO GUARANTEES in the Short Sale process.
Information herein deemed accurate but not guaranteed.