Short Sale 101, Part 3
In the earlier posts in this series, we discussed the primary requirements a distressed homeowner must meet in order to obtain a short sale approval. It might be helpful, at this juncture, to go into some detail with respect to the documentation that will be required if the bank before they will consider approving a short sale. Borrowers contemplating a short sale should be aware of these document requirements.
The first document that any bank will require is a written request for approval of a short sale. The bank has to know what you want to accomplish. Second, is the borrower’s hardship letter, explaining in some detail the nature of the financial hardship that prevents that borrower from continuing to make their monthly payments.
The third document required will be the borrower’s authorization allowing the bank to speak to the borrowers Realtor©. Without that signed authorization, the bank may not discuss your situation with your Realtor© or anyone else.
Almost every bank will require copies of the borrower’s tax returns as filed for the past two years. The bank will require every single page and every single schedule filed with the IRS. They will match the data provided in the tax return with other documentation you will have to submit. All W-2s and/or 1099s filed with the IRS must be included for the tax years involved.
The bank will also require documentation verifying all income streams, paycheck stubs, commission checks, documents reflecting bonus payments, tips or any other documentation pertaining to the borrower’s income. If the borrower’s income comes from a business that they own, they will require copies of the books for that business.
The bank will require documentation reflecting all of the borrower’s liquid assets, checking accounts, savings accounts, money market funds, Christmas savings account funds and documents pertaining to stock, bond, mutual fund or other investment accounts.
They will also require documentation pertaining to non-liquid assets such as any other real estate owned, vehicles owned or leased or other major assets owned.
If, as frequently happens, the bank is slow in processing your short sale request, it may be necessary for you to provide more current documentation on your income or your assets. They always want the most up-to-date information. In addition, the processors will not forward your file to a decision-maker unless all of the data is current. There is a no tolerance policy involved here. Space borrowers who are not diligent record keepers may find it necessary to contact their banks, investment companies to obtain the required documentation on that company’s letterhead. This process could take some time. It may be prudent to collect the documents in advance so that you do not delay the process of submitting your short sale package.
We reiterate that it is very important to select the right Realtor© to handle your short sale. A short sale package may exceed 110 pages of documentation when submitted to the bank. If it is inaccurate are incomplete, the bank will reject it. Most distressed homeowners have not made their monthly mortgage payment for some time. Therefore, the foreclosure process has begun and time is of the essence. Delays on the part of the borrower only hinder their chances of success.
If you have any questions about the information covered in this post, or any of the previous posts in this series, feel free to give us a call at 916-337-0658. We will be happy to clarify any of the points made.
Stay tuned for more information on the subject.
A short sale property is one that is on the market with an asking price that is less than the seller owes on the property.
Not many banks are known for their philanthropic pursuits, they are in business to make money. Debt forgiveness is not high on their priority list. So getting them to accept a short pay on a mortgage loan is not an easy task.
However, the housing market has changed over the past year. Remarkably, distressed homeowners with a legitimate hardship are finding it slightly easier to obtain a short sale approval. As with most things, if the distressed homeowner prepares properly they increase their chances of success.
For the purposes of simplifying this discussion, we will use the term bank when we refer to the lender and/or servicer. In fact, most loans are sold on the secondary market and the organization that actually owns the note (title to the property) may be your insurance company, union retirement fund or any number of investment entities commonly known as the investor.
Usually, the organization to which you make your loan payment is a loan servicer that works for the investor. That loan servicer may or may not have the decision-making power to accept or reject a short sale request. However, distressed homeowners must present their short sale requests to the servicer in the form that servicer requires.
One of the first things that the bank will look at is the seller’s financial hardship. That hardship must be one that meets the banks guidelines. The distressed homeowner must include a hardship letter, explaining why they can no longer make their monthly payments, accompanied by supporting documentation. The bank will verify every detail. Some homeowners try to beat the system by omitting income streams and assets from their financial picture in the short sale request package. That is fraud and can result in severe penalties.
A partial list of hardships that are usually accepted include:
Business Failure Job Loss
Damage to the property Mandatory Job Relocation
Death in the Family Medical Bills
Divorce Military Service
Insurance or Tax Increase Military Service
Incarceration Severe Illness
Increase in Mortgage Payment Too Much Debt
The second thing the bank will consider is if there is insolvency. If the distressed homeowner has liquid assets that can be used to pay down or pay off the debt, that homeowner does not meet the insolvency test. (Federal Law excludes 401K retirement account balances from this calculation).
The third requirement that distressed homeowners must demonstrate in order to obtain short sale approval is a monthly income shortfall. A simple list of monthly income less a list of monthly expenses will provide the proof needed for this test. Remember to list only minimum monthly payments when making this calculation.
Once again, the bank will review every document provided and check each for authenticity. Borrowers with a verified, acceptable hardship will receive serious consideration for their short sale request.
For those seriously considering a short sale, we recommend that you enlist the professional services of a qualified Realtor®, certified to handle short sales. The process is time consuming and requires a highly detailed approach if one is to achieve shot sale approval. Not all licensed real estate agents have the skills, interest or patience to meet your goal.
Call us at (916) 337-0658 if you have any questions or wish to consider short selling your house.
Stay tuned for more on short sales.
What is a short sale? A short sale is transaction in which the seller is attempting to sell their property for less than they owe the lien holder or lien holders. In almost all cases something has happened that prevents the homeowner from being able to continue to make their mortgage payments.
The difficult part of this process is getting the lien holder or lien holders to accept the short pay. Short sale properties are available everywhere and offer the potential of being a GREAT BUY. However, they usually take a long time to complete and, because many lien holders can not or will not accept a short pay, many attempts at a short sales fail. Also, many buyers give up in frustration and move on to another property because they get tired of waiting for lien holder’s approval.
Do I qualify for a Short Sale? Qualifications for a short sale include any or all of the following:
- Financial Hardship – an acceptable reason (as determined by the lien holder) causing the homeowner to have trouble affording their mortgage payment. Some acceptable reasons include; death in the family, serious injury impacting a wage earner’s income, loss of job, major reduction in income… to name just a few.
- Monthly Income Shortfall – You have more month than money.
In all cased the homeowner must document the reason they can not make their payments. Tax returns, pay checks, bank statements, investment account statements, documentation from employers are part of the paperwork required.
The fact that the value of your home has declined and your mortgage payment is too high given the current market value is not an acceptable reason.
More on Short sales will be posted soon.
Call (916) 337-0658 if you want to discuss your particular situation. Each one is different.
FANNIE MAE & FREDDIE MAC ANNOUNCE EVICTION MORATORIUM
The goal is to provide distressed homeowners who are about to be evicted a few days grace period. Unfortunately, it is only a very short reprieve. January 2nd will be here very soon. Let us hope that this will help some of these families at a very difficult time. Perhaps the extra few days will allow some to find better alternative placed to live as they struggle to get their lives back on track.
OWNING A HOME CHEAPER THAN RENTING
A recent Wall Street Journal article indicates that owning a home in certain markets is cheaper than renting. The Journal’s third-quarter survey covers the 28 largest metropolitan areas. The Sacramento metropolitan area is one of those market areas where homeowners fare better than do renters.
The article explains that lower housing costs combined with rock bottom mortgage interest rates make home ownership less expensive than they have been in the past 15 years. Included in their calculations are the cost of real estate taxes and insurance. (Naturally, the taxes and mortgage interest are tax deductable.)
The article goes on explain that a major reason more renters are not taking advantage of the situation is the difficulty in qualifying for a loan. Lenders are far more cautious than they have ever been when considering a borrower’s qualifications. Credit issues considered minor in years past can be deal breakers.
Select this link to read the article:
There is considerable detail included.
Those who wish to purchase a home but are not presently qualified would be well advised to start planning on how to improve their financial picture in order to qualify for financing in the future. Consulting a loan-originating professional may be the best course of action. Once the skeletons in the financial closet are identified, plans can be made to remove them. The process may only take a few weeks or it may take several years.
A few steps to take immediately are to:
- Pay all of your bills ON TIME. Pay more than the minimum payment when possible.
- Avoid adding credit accounts
- Pay down outstanding account balances when ever possible
- ALWAYS pay your mortgage payment or rent ON TIME
- Pay the few dollars it costs to get a credit report and check that report for errors. Unfortunately, errors are common and can result in denial of a mortgage loan application.
- Try not to use more than 50% of your credit line on any account. Less is better.
- Do not close an account when you have paid off the balance. Charge a small amount on that account ever month or two.
- Maintain at least three credit accounts in good standing at all times
- Pay your taxes on time.
The bottom line is that those who prepare are more likely to achieve their goal of home ownership, and the cost of the associated financing will be far lower.