1) What exactly is a SHORT SALE?

A short sale is when a property is sold for less than the sum of all liens on the property.  The lender often  agrees to forgive the unpaid amount and releasing the borrow from any remaining obligations.

2) What conditions must exist for a lender/service company to consider a short sale?

The borrower must be able to demonstrate the inability to pay their mortgage and currently experience a hardship. Many servicing companies and lenders will require that the borrower first attempt to do a loan modification before they will allow a short sale.

3) What is a loan servicing company and what do they do?

Servicing is the process by which a mortgage bank or subservicing firm collects the timely payment of interest and principal from borrowers. The level of service varies depending on the type of loan and the terms negotiated between the firm and the investor seeking their services. Their duties generally include collecting mortgage payments and crediting those payments as well sending out payment reminders establishing escrow accounts and making payments to taxes and hazard insurance companies.  They are responsible for all these activities as well as loss mitigation when a loan begins to default.  It is the servicer’s responsibility to report all activity back to the investor.

4) How can an agent be sure they will get paid or will not have the fee substantially reduced?

Real estate commissions get paid from the proceeds of the sale. The Treasury department guidelines have set up rules to protect real estate fees in order to attract the highest quality of professional.  The guidelines allow for fees  up to 6%.  Negotiation of fee (not in excess of 6%) is not allowed as a condition for the servicing company to accept the offer.

5) When do the new treasury guidelines take affect?

April 5, 2010; but servicers have the option of starting sooner. The program is scheduled to continue until 2012, but only applications received on or before December 31, 2012 will be considered.

6) Why do short sales take so long to complete?

As per the new Treasury department guidelines, once a completed proposal has been received by the servicer they have TEN days to reject or accept the offer. Closing will take place no sooner than 45 days of submission unless agreed to by the buyer.

Some of the reasons why short sales take so long seem to get addressed in the guidelines by way of servicers having to respond in 10 days. The servicers also receive $1,000 incentive for a timely completed transaction.

Other reasons for short sales taking so long has to do with incomplete submission of short sale proposals and failure to adhere to servicers request for documents in a timely manner.

7) What are considered acceptable hardships by the servicers/lenders?

Hardships generally fall into 5 categories.  Let’s call them the 5 D’s:

• Death –of a borrower
• Dying-Sickness of a borrower affecting their ability to earn and pay their debt
• Destitute-an involuntary loss of income
• Divorce- in this case, when one of the occupants leave and it affects the income of the house it can be deemed an acceptable hardship.
• Disasters – in the case of natural disasters

8) What if a homeowner is current on their mortgage?

It is not necessary for a borrower to be late on their mortgage in order to engage in a short sale.  What is important is being able to demonstrate the inability to pay the monthly mortgage debt.  Even if the payment is being made now but documentation proves a foreseeable default, this is acceptable.

9) What will happen to the credit score of a borrower who completes a short sale?

The effects on credit will vary depending on payment history and the payments of other debts. Assuming the borrower is current on their mortgage upon completion of a short sale, they may only see a 50 point reduction in your credit score. Foreclosure on the other hand can lower your score by 200 points or more (NAR).

10) How will the short sale show up on a credit report?

It can show up in several different ways but generally speaking it will say something along the lines of: “Paid in full; settled for less than originally owed.”

11) If a borrower wants to do a short sale, can the property be sold to a family member?

No! It is a requirement of the short sale agreement that the sale is an arms length transaction. This means in no way can the seller and buyer be related in family or business. The buyer will also be required to include language in the sales contract that they will not sell the property for at least 90 days and a statement affirming the arms length transaction.

Feel free to submit more Questions to Phil in the comment section below.

-The KCM Crew

——————————————————————————————————————————————————————-

Phil has been actively teaching on defaulted real estate for the past 3 1/2 years.  He has written and teaches the only class in the country approved by NAR to satisfy the prerequisites for receiving SFR certification.  He is also one of only a few speakers NAR acknowledges to speak on the topics of Short Sales and REOs.  As a former New York City firefighter, Phil knows what it is like to help a family in need.  He extends the same helping hand when rescuing families from foreclosure.