Step 1 of a Short Sale
The First Step is to Identify Your Short Sale Type
Before pushing your agent to slide that short sale listing into MLS, it's a good idea to stop and think about the first step in a short sale. Sellers get overly anxious. And it's no wonder. Many of them have been trying in vain to do a loan modification or work out some other kind of financial arrangement with their bank, and they're worn to the bone, frazzled. They want to be put out of their misery.
Because of the intensity and frustrations inherent in situations with an underwater home, it can be difficult to have patience. You might be tempted to skip that first step of short sale and jump directly to accepting offers. But you'd probably be making a huge mistake.
Take That First Step and Identify Your Short Sale
The secret to identifying your short sale lies with your bank and the type of loan secured to your home. The first thing to do is to call your bank and ask what kind of loan you have. Find out if your loan is owned by that bank or if it is owned by another bank and yours is merely the servicing entity.
Do you have more than one loan? Will you face a deficiency judgment? You may need to get legal advice.
Depending on your type of loan and your situation, you will then choose your type of short sale.
First Step to Choosing Your Type of Short Sale
Every short sale is different. If you choose the wrong short sale, you could face personal liability, and you might be losing out on relocation funds.
Here are a variety of short sales that you might qualify to do, based on your type of loan and personal situation. You really should not move forward on a short sale until you have completed this first step. Which type of short sale will you do?
- HAFA Short Sale
A HAFA short sale was once available only to sellers of a personal residence who have a severe financial hardship and limited cash assets. It was designed to streamline the short sale process, release sellers from liability and provide relocation assistance. HAFA short sales also pay the seller a relocation incentive, providing the home is occupied. However, HAFA short sales are no longer being processed.
- Fannie Mae HAFA Short Sale
There are no Fannie Mae HAFA Short Sales anymore. Fannie Mae has its own program for a short sale that does not involve the regular HAFA guidelines. Check the Fannie Mae website for short sales. Fannie Mae does often allow an incentive to a homeowner who occupies the property.
- Freddie Mac HAFA Short Sale
Freddie Mac typically expects delinquency on your mortgage payment. Many Government Sponsored Entities insist that you stop making your mortgage payment. There are also no Freddie Mac HAFA short sales anymore. Freddie Mac does often allow an incentive to a homeowner who occupies the property.
- Fannie Mae Short Sale
I've yet to close a Fannie Mae short sale in which the seller is current. Every single one I've done, Fannie Mae won't consider the short sale until the seller agrees to stop making mortgage payments. Getting Fannie Mae approval adds an extra layer to the short sale process and can extend that time for approval by 2 weeks to 30 days.
- Freddie Mac Short Sale
Every bank handles a Freddie Mac a bit differently. Generally, banks servicing a Freddie Mac loan want a 4506 and an 1126 form. The 4506 lets the bank order copies of your tax returns, and the 1126 is a financial statement. Freddie Mac might want to see that your loan is in arrears, as well. Hey, it's the government. The government wants you to stop making your payments. Isn't that great? Not really.
- Traditional Hardship Short Sale
In a traditional short sale, your hardship letter will be closely examined. You will also have a better chance of walking away if your loans were originally purchase money loans. Those two combinations make for a successful and pretty much stress-free short sale, if there is such an animal.
- Strategic Short Sale
One institution that stands out because of its cooperative short sale program is Bank of America. In a Cooperative Bank of America short sale, the bank preapproves the purchase price and the seller, and negotiates a seller contribution in advance, before your home goes on the market. Bank of America has pretty much discontinued the cooperative program and may consider it on a case-by-case basis.
It is a myth that a seller must face a financial hardship to do a short sale. However, if you have no hardship, plus you have a hard-money loan, you will probably pay a lot more than for simply no hardship at all. It's like having two strikes against you. California sellers are prohibited from being forced to make a contribution.
- Mortgage Insurance Short Sale
If your loan has mortgage insurance, MI will add another layer to the process. The mortgage insurance company will be required to approve or reject the short sale. Bear in mind that the mortgage insurance company will pay either way -- foreclosure or short sale -- and it might get paid more to do a foreclosure. I'd say the odds are about 50 / 50. With any luck, your MI will have gone out of business. The basic risk with MI is it might want a contribution, either a prom note or cash to approve.
- Two Loans on a Short Sale
The best thing to say about two loans on a short sale is at least there is probably no mortgage insurance, but sometimes the first lender takes out its own MI policy. Depending on the type of second loan, though, the lender may or may not be willing to cooperate. Its PSA could provide a greater financial incentive for foreclosure than a short sale, but in my experience those situations are rare. Generally, the second quietly snatches its $3,000 to $6,000 or so and crawls away.
At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.