UNDERSTANDING SHORT SALES

Presented By Westchase Law, P.A.

WHAT IS A SHORT SALE?

When a homeowner’s home is no longer worth what they owe and they can no longer pay their mortgage or are facing a financial hardship they can try to do a short sale with their mortgage lender.

Westchase Law, P.A. can work with you and your lender to get a short sale completed for your loan by submitting the required paperwork, offers and negotiations. Short Sales are very time consuming, that is why we do not recommend for homeowners to negotiate their own short sales.

In this packet we will go over the different investors that may own your loan which ultimately make the final decision regarding the short sale. There are: FHA LoansFannie and Freddie Mac LoansPrivate Mortgage Insurance (PMI) Private InvestorsCredit Unions

FHA LOANS

FHA GUIDELINES

Do you own a HUD-FHA financed home, and need to do a Short Sale?

Here is a summary of the requirements do perform an FHA-insured HUD Short Sale or "Pre-Foreclosure" Sale:

You must be delinquent 31 days or more delinquent at the time of sale.

You must list the property with an un-related Licensed Real Estate Broker

You must actively market the property for four months (up to six).

FHA LOANSFHA GUIDELINES

For the first 30 days of marketing, the short sale lender (mortgagee) may only approve offers that will result in a minimum net sale proceeds of 88% of the "as-is" appraised Fair Market Value (FMV).

During the next 30 days of marketing, the lender may only approve offers that will result in minimum net sale proceeds of 86% of the "as-is" appraised FMV.

For the rest of the marketing time (60 days), the lender may only approve offers that will result in minimum net sale proceeds of 84% of the "as-is" appraised FMV.

FHA LOANSFHA GUIDELINESThe property must be an owner-occupied, except for cases of job transfer, death, divorce, job loss

There should be written proof of your decrease in income showing inability to pay the mortgage, job loss, etc.

HUD will pay up to 1% of buyer's mortgage as part of closing costs if the new mortgage is also FHA, plus reasonable "seller" costs

HUD allows 6% Realtor commission

HUD will not pay for Home Warranties, points or lender's title insurance

You must get approval to participate in the HUD Pre-Foreclosure Sale Program in advance

Upon acceptance into the program, you will be given Approval To Participate Form which will outline program restrictions

FHA LOANSFHA GUIDELINES

HUD will give an incentive to the homeowner if the closing of the short sale takes place within a certain time frame of $1,000. Once that date passes the incentive is reduced to $750

Remember, these guidelines apply to FHA-insured loans only, and there may be some latitude in those requirements. These guidelines are subject to change.

FANNIE MAE AND FREDDIE MAC LOANS

Fannie Mae and Freddie Mac Guidelines

Both Fannie and Freddie Guidelines are similar in nature as to how they process the short sales and whether you qualify under the HAFA/HAMP/HARP programs first before proceeding with the short sale to avoid foreclosure. Pursuant to their guidelines the consumer must be in default of their loan in order to be considered for one of their programs. Default meaning you must have missed your first 30 days payment in order for the file to be considered for a short sale.

 However, You do not have to be delinquent if you fall under any of these extenuating circumstances: •Death of a Borrower or Co-borrower•Divorce or legal separation•Illness or Disability of Borrower or Co-borrower•Distant employment transfer

FANNIE MAE AND FREDDIE MAC LOANSFannie Mae and Freddie Mac Guidelines

QUESTION: DOES FREDDIE MAC PURSUE DEFICIENCIES?

Freddie Mac does not pursue deficiency on short sales.  The Guide states that the servicer must file the appropriate 1099 on short sales.  If we cancel the debt (as we do with short sales) we can't turn around and pursue it.

The problem seems to be that some of our servicers include information in their approval letters that states that we may preserve our right to pursue a deficiency on short sales.  This is not true.

The Guide reference is

Chapter 55.3.1: IRS Form 1099-C, Cancellation of Debt (04/25/06) states that the Servicer must report cancellations of Borrowers' mortgage debt on IRS Form 1099-C, Cancellation of Debt, as required by the Internal Revenue Code.  Under 55.3.1.d .6 it defines a short sale (not by name) as "A discharge of indebtedness under an agreement with the debtor to cancel the debt at less than full consideration. Freddie Mac will advise the Servicer if such an agreement is reached with a Borrower.".

Once a debt is cancelled there is no longer a deficiency to pursue.  

  CHECK TO SEE IF THE PROPERTY IS OWNED BY FANNIE OR FREDDIE PLEASE REFER TO THE BELOW WEBSITES:

 WWW.FANNIE.COM AND WWW.FREDDIE.COM 

You must have the social security number for Freddie’s lookup

PRIVATE MORTGAGE INSURANCEPMI GUIDELINES

Many consumers are unaware that they are carrying Private Mortgage Insurance with their loan when they first purchased their property. In the event they are paying mortgage insurance with their loan, we are facing an approval process from the MI company in order to complete the short sale. The MI company may not participate in the HAFA/HAMP/HARP Programs offered to the consumer and can deny the request for either program. The MI companies have an agreement with the servicing company (lender) which states that they have the right to negate or proceed forward with the short sale or pay out the claim. Many times the insurance company, if they see that the consumer have the ability to pay, may require a promissory note in the form of 0 interest, with payments up to 120 months, or a cash contribution to make the deficiency amount be waived.

 

It is important to check before proceeding with the short sale whether we are facing a third party approval from the MI company as you may be faced with a difficult decision to make as to whether you will sign a promissory note or provide the cash to contribute.

PRIVATE INVESTORSPRIVATE INVESTOR GUIDELINES

Private Investors are not governed by Fannie or Freddie. Private Investors service their own loans and are the source of their own funds, and they may or may not be backed with insurance. This means that they can control what the realtors make as far as their commissions and they can control how much closing costs they are willing to pay to any other lien holder on the file.

 

On the other hand, some private investors (lenders) who are in control of their own loans will approve the short sale a lot quicker than going through Fannie/Freddie and other programs.

Bottom line is that each Investor is different in how they work the short sales.

CREDIT UNIONS

 

Please be advised that most credit unions will not waive any deficiencies which will force the consumer to file for immediate bankruptcy as they will not cooperate with any lenders or government programs.

 

We have come across that the credit unions will look at the situation at hand but the hardship will have to be substantial in order to get the deficiency waived.

DO I QUALIFY FOR AN INCENTIVE PROGRAM?

There are many incentive programs that have been roaming around with many success stories. Each program has similarities and differences depending on the servicing company. The main question is, do you qualify? It will depend on the servicing company and your financial situation.

Below are the different programs out there:

Home Affordable Foreclosure Alternative (HAFA)- This is a government program that many lenders are participating in. Each servicing company that participates may have different guidelines for this program but some do stay the same:

• The homeowner has to face a significant financial hardship to qualify.

• Once approved the bank will waive their right to seek a deficiency judgment against the homeowner and settle the loan for “less than the amount owed.”

• The homeowner may qualify to receive relocation money of up to $3,000 if they live in the property. If they have a tenant living in the property the tenant will receive the relocation money.

DO I QUALIFY FOR AN INCENTIVE PROGRAM?

Bank of America Cooperative Short Sale- This is another program that Bank of America is giving out that is very similar to that of the HAFA program. It was mostly created for the sellers that had investment properties.

• The seller has to face a significant financial hardship to qualify.

• Seller may receive up to $2,500 incentive for the completion of the short sale.

• Once the short sale has closed the bank will waive their right to pursue a deficiency judgment against the seller.

Bank of America Incentives- Right now Bank of America is giving an extra incentive to those homeowners who qualify for either the HAFA or the Cooperative Short Sales. These incentives range from $3,000-$30,000. Bank of America is only providing these programs for a limited time so the sooner you start the short sale the better.

DO I QUALIFY FOR AN INCENTIVE PROGRAM?

FHA Incentive- FHA loans are worked differently and they also give an incentive once the transaction closes. Details of FHA loans is explained with more detail in this packet under FHA LOANS.

Homeowners will receive up to $1,000 if the closing of the property takes place within a certain time frame. If it closes after the requested date the homeowner will only receive $750.