An Overview of Arizona Short Sales

The Basics of Arizona Short Sales

Banks grant short sales for 2 reasons: the seller has a hardship, and the seller owes more on the mortgage than the home is worth.

A few examples of a hardship are:

  • Unemployment / reduced income
  • Divorce
  • Medical emergency
  • Job transfer out of town
  • Bankruptcy
  • Death in the family

The seller will need to prepare a financial package for submission to the short sale bank. Each bank has its own guidelines but — with the exception of the formal Wachovia, which was the best short sale bank in the world — the basic procedure is similar from bank to bank. The seller’s short sale package will most likely consist of:

  • Letter of authorization, which lets your agent, or anyone you authorize, speak to the bank.
  • HUD-1 or preliminary net sheet
  • Completed financial statement
  • Seller’s hardship letter
  • 2 years of tax returns
  • 2 years of W-2s
  • Recent payroll stubs
  • Last 2 months of bank statements
  • Comparative market analysis or list of recent comparable sales

Writing the Short Sale Offer and Submitting to the Bank

Before a buyer writes a short sale offer, a buyer should ask his or her agent for a list of comparable sales. Banks are not in the business of giving away a home at rock-bottom pricing. The bank will want to receive somewhat close to market value. The short sale price may have little bearing on market value and may, in fact, be priced below the comparable sales to encourage multiple offers.

After the seller accepts the offer, the listing agent will send the following items to the bank:

  • Listing agreement
  • Executed purchase contract and related addendums
  • Buyer’s  pre-approval  letter
  • Seller’s short sale package

If the package is incomplete, the short sale process will NOT begin or will be delayed. In this event, the bank might even shred the package.

The Short Sale Process at the Bank

Buyers may wait a very long time to get a response from the bank. It is imperative for the listing agent to regularly call the bank and keep careful notes of the short sale process. Buyers may get so tired of waiting for short sale approval that they may feel the need to threaten to cancel if they don’t get an answer within a specified time period.

That type of attitude is self-defeating and will not speed up the short sale process. If buyers are the type with little patience, perhaps a short sale is not for them.

Following is a typical short sale process at the bank:

  • Bank acknowledges receipt of the file. This can take 10 days to a month.
  • A negotiator is assigned. This can take 30 to 60 days.
  • A BPO (Broker Price Opinion) is ordered. The bank probably will refuse to share the results of the BPO.
  • A second negotiator may be assigned. This can take another 30 days.
  • The file is sent to the PSA (Pooling Servicer Agreement). This can take 2 weeks to 30 days.
  • The bank issues a short sale approval letter and sometimes a closer is assigned who is different from the negotiator.
  • The buyer cancels.

I threw in that last line because sometimes I have to sell my short sales 3 or 4 times before a buyer sticks with the transaction. Buyers get angry and annoyed because the short sale process can be so lengthy that they sometimes cancel without telling anybody. Some short sales get approval in 6 to 8 weeks. Others take 90 to 120 days, on average.

Lenders will consider the following hardships, and they don’t necessarily need to be a hardship you are going through personally. It could also be a family member who supports you financially or emotionally or both:

  • Loss of income (new job, partner’s loss of job, pay cut)
  • Job transfer (voluntary or involuntary)
  • Divorce, separation or marital difficulties
  • Exotic mortgage terms (an ARM loan)
  • Unemployment
  • Service in the Military
  • Death in the family
  • Incarceration
  • Illness or medical emergency
  • Increased expenses and excessive debt
  • Unexpected expenses or costly home maintenance

But do you necessarily need to be in a Hardship to do a Short Sale

Maybe, depending on a number of variables. The decision of the lender is most certainly a financial one. A hardship is not always necessary because sometimes the bank decided it’s in their best financial interest to let the property Short Sale than risk taking it in foreclosure. Each case is different and unique and unfortunately there is no “for sure” process in Short Sales, regardless if you have a Hardship or not.

How can you help your Short Sale success?

The best way to do a short sale is to write a strong and honest hardship letter. Put some thought into it. Think about your financial situation in terms of the mortgage you cannot pay or struggle with paying (whether financially or mentally or both). Why do you need out or want out? Honestly?

Other steps you should consider when doing a Short Sale

  • Talk to a lawyer specializing in Real Estate who knows Short Sales and anti-deficiency cases.
  • Talk to a tax professional about possible tax obligations when doing a Short Sale.
  • Hire an experienced Short Sale listing agent like myself with an experienced team to assist you.
  • Price the home accurately and in line with comparable sales (too high it won’t get a buyer, too low and the lender may not approve the Short Sale)
  • Gather the required documentation needed to get your Short Sale approved (we will assist you).
  • Be responsive to any requests or additional documentation that are requested.

Can I do a Short Sale without being Delinquent?

It appears that if your loan in owned by Fannie Mae (3 out of 4 loans), you will need to be delinquent before they will approve your Short Sale. Even if the front end lender servicing the loan approves your Short Sale. Fannie Mae is likely to kick back the request for Short Sale approval without delinquency.

What is a Fannie Mae short sale?

Once you receive an offer to buy your Short Sale home, it along with other required documentation, is sent to the seller’s bank. If the bank is just servicing the loan because the loan has been sold to Fannie Mae (3 out of 4 loans), not only will the front end bank process the short sale, but so will Fannie Mae. This means even if the seller’s primary lender approves the short sale, Fannie Mae has the final say. This of course adds additional delays in the process as well.

Will Fannie Mae delay a Trustee’s Sale if a Short Sale Offer is pending approval?

Fannie Mae is not very giving in this situation. Once a notice of default has been filed, Fannie Mae has said it will not stop the foreclosure process while an approval is pending on a Short Sale. If the Short Sale cannot be fully approved prior to the auction date, Fannie Mae will more than likely foreclose (even if the delays for the approval are Fannie Mae’s fault). It is likely that if the servicing lender approves the Short Sale and submits it to Fannie Mae, they will also request a foreclosure delay if the foreclosure is scheduled for 2 to 3 weeks or sometime only days away from happening. There, of course, is no guarantee it will be postponed.

Qualifications for a Short Sale

Before you eagerly climb aboard the short sale train, or sometimes turtle, consider the following to determine whether you may qualify for a short sale. If you cannot answer yes to all four requirements, you MAY not qualify for a short sale.

  • The Home’s Market Value Has Dropped.

Hard comparable sales must substantiate that the home is worth less than the unpaid balance due the lender. This unpaid balance may include a prepayment penalty.

  • The Mortgage is in or near Default Status.

Lenders will more than likely not consider a short sale if the payments are current. This doesn’t mean you can’t begin the process before you’re late, but you should prepare yourself for delays or flat-out rejection if you are not late and are trying to submit a Short Sale package and offer.

  • The Seller Has Fallen on Hard Times.

The seller must submit a letter of hardship that explains why the seller cannot pay the difference due upon sale, including why the seller has or will stop making the monthly payments.

A few examples that do NOT constitute a hardship are:

  1. Bad purchase decisions. Blowing your paycheck on a new BMW, that you just had to have, does not qualify as a hardship.
  2. Unhappy with the neighbors. Even if every home on your block has turned into a crack house, that will not qualify as a hardship.
  3. Buying another home. The lender will not care if you have decided the home is no longer suitable for you or your family.
  4. Pregnancy. Increasing the size of your family or starting a family is not considered a hardship. Even if…..it actually can be one..

Although all lenders have varying requirements and may demand that a borrower submit a wide array of documentation, the following steps will give you a pretty good idea of what to expect.

  • Call the Lender.
    You may need to make many phone calls before you find the person responsible for handling short sales. You want to speak with someone in the loss mitigation department and get advice on what your particular lender requires in a Short Sale. Find out if your lender is the servicer for your loan and it actually held by Fannie May or another investor. These are also steps a good Short Sale agent can assist you with, but it’s always a good idea to speak with your lender about your options. It’s never a good idea to avoid speaking with them.
  • Submit Letter of Authorization
    Lenders typically do not want to disclose any of your personal information without written authorization to do so. If you are working with a real estate agent, closing agent, Title Company or lawyer, you will receive better cooperation if you write a letter to the lender giving the lender permission to talk with those specific interested parties about your loan. The letter should include the following:
  • Property Address
  • Loan Number
  • Your Name
  • The Date
  • Name & Contact Information of who’s authorized to speak with them about your loan(s)

 

  • Preliminary Net Sheet
    This is an estimated closing statement that shows the sales price you expect to receive and all the costs of sale, unpaid loan balances, outstanding payments due and late fees, including real estate commissions. Whoever is negotiating your Short Sale should be able to assist you or do this for you. The lender will use all these figures and the final total as a basis for the approval of the short sale and they will expect proceeds that equal the final total.
  • Hardship Letter
    The sadder, the better. This statement of facts describes how you got into this financial bind and makes a plea to the lender to accept less than full payment. Lenders can understand if you lost your job, were hospitalized, but lenders are not particularly empathetic to situations involving dishonesty or criminal behavior. Not surprising.
  • Proof of Income and Assets
    It’s best to be truthful and honest about your financial situation and disclose assets. Lenders will want to know if you have savings accounts, money market accounts, stocks or bonds, negotiable instruments, cash or other real estate or anything of tangible value. Lenders are not in the charity business and often require assurance that the debtor cannot pay back any of the debt that it is forgiving.
  • Copies of Bank Statements
    If your bank statements reflect unaccountable deposits, large cash withdrawals or an unusual number of checks, it’s probably a good idea to explain each of those line items to the lender. In addition, the lender might want you to account for each and every deposit so it can determine whether deposits will continue.
  • Comparative Market Analysis
    Sometimes markets decline and property values fall. If this is part of the reason that you cannot sell your home for enough to pay off the lender, this fact should be substantiated for the lender through a comparative market analysis (CMA). Your real estate agent can prepare a CMA for you, which will show sales prices of similar homes:
  • Purchase Contract & Listing Agreement
    When you reach an agreement to sell with a prospective purchaser, the lender will want a copy of the offer, along with a copy of your listing agreement with your Real Estate agent. Be prepared for the lender to renegotiate commissions and to refuse to pay for certain items such as home protection plans, HOA transfers, or termite inspections.

Deficiency judgments sometimes pop up after a foreclosure or short sale. That’s because many sellers don’t obtain legal or tax advice in advance, so the deficiency judgment comes as a surprise. Moreover, deficiency judgments are a complicated process to understand.

Promissory Notes and Mortgages

Contrary to what people think, deficiency judgments stem from the fact a borrower defaulted on a promissory note, not the mortgage. A promissory note is a promise to pay. It can also provide for personal liability. Personal liability means the lender can come after your assets if you do not make your payments.

A promissory note is secured by a trust deed. The trust deed is recorded in the public records where the property is located, which gives the public constructive notice that the home has a lien against it.

Foreclosure

If the promissory note is not paid as agreed, the beneficiary has the right to foreclose upon the property, because the property is the security for the promissory note.

If the borrower does not bring the payments current or pay off the existing loan(s) during the foreclosure period, the home will go to auction. If the home sells for more than the amount that is owed, there is no deficiency; however, that rarely happens. Generally it sells for less.

Banks get the home in foreclosure when nobody bids enough to pay off the bank. The bank also has a right to sell the home for less to the highest bidder at the auction, but generally banks prefer to sell to a private party after the foreclosure, hoping to get more money on the open market.

Short Sales

While the home is pending foreclosure proceedings, sometimes banks will agree to cut their losses. They do a short sale by accepting less than the amount that is owed.

The home seller hires a real estate agent to find a buyer for the short sale. The buyer makes an offer and, if the bank accepts it, the home is sold at a loss to the bank.

Deficiency Judgments

A deficiency is the difference between the fair market value of the property and the amount received, providing the amount received is less than the amount owed.

Whether the bank can pursue a deficiency judgment after a foreclosure or short sale depends in part on whether the promissory note makes the seller personally liable for the debt. Some states allow for personal liability.

The Impact of Short Sales and Foreclosures on Credit Reports

Sellers may wonder whether doing a short sale would affect their credit less than completing a foreclosure,  and whether there are other advantages between the two. While in foreclosure, a seller could possibly stay in the property, essentially rent free, for four months to a year before being forced to vacate. But that fact alone does not mean a foreclosure is better.

Whereas a short sale involves offering the home for sale, generally listed through MLS. Potential home buyers will make appointments to view the home, some will make lowball offers, agents might hold open houses and, in general, a seller’s life will be disrupted, all in the hopes that a buyer will buy the home.

How is a Short Sale Seller’s Credit Affected?

Fair Isaac released a report that says credit scores are affected about the same, whether a seller does a short sale or foreclosure. Fair Issac says the average points lost on a FICO score are as follows:

  • 30 days late: 40 to 110 points
  • 90 days late: 70 to 135 points
  • Foreclosure, short sale or deed-in-lieu: 85 to 160
  • Bankruptcy: 130 to 240

This is debated in the industry and there are cases that seem to support both arguments. Sometimes the credit score impact of a Short Sale does differ from that of a foreclosure. It ultimately depends on how the lender reports it to the credit bureaus.

Waiting Period Before Buying Another Home

· Foreclosure or Deed-in-Lieu of Foreclosure
Seller who wants to buy another home after foreclosure will end up waiting about 24 to 72 months before a lender will offer any kind of interest rate that makes sense.

Short Sale
Some agents say the good news for short sale sellers is the wait is much shorter before buying another home, and Fannie Mae guidelines in 2008 adopted new procedures. The good news is a short sale will allow the consumer to obtain an institutional loan for a new home within two years, typically.

FHA adopted guidelines in 2010 that say a seller who is current and does a short sale may qualify to immediately buy another home. Lenders aren’t so quick to follow those guidelines.

Note that Fannie Mae guidelines allow a seller to immediately apply for a new loan to buy another home if that seller kept the payments current, had no delinquencies exceeding 30 days and did not agree to repay the debt relief. Moreover, it’s the late payments that dramatically affect your credit report, not the short sale.

I am not licensed to give legal or tax advice and provide this information for general information purposes. If you desire legal advice or more information, please contact a real estate lawyer or a CPA.

Joyce Corsi Hazen, REALTOR®, CNE, SFR
Long Realty Arizona Properties
Member of the Peoria Chamber of Commerce
Cell:  602-284-9822
Office:  623-209-2400
Fax:  623-505-4346
Toll Free: 877-477-2578 (U.S only)
Website:  www.JoyceHazen.com
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About Joyce Hazen, REALTOR, CIPS, CNE, SFR

An Arizona and Greater Metropolitan Phoenix Realtor, I am a full service professional with an International Designation, CIPS, who works with Buyers, Sellers & Investors all around the world. I have experience in both the residential and commercial communities. In addition, as a Certified Negotiation Expert I work my hardest to utilize my negotiation skills to benefit all clients. I also speak French, English and Italian. Originally from Canada, having moved to the Valley in 2000, I pay special attention to your personal individual needs and desires, to find you the home, land, or building that you’ve been dreaming of. Real Estate has given me the privilege of working with so many wonderful people and with my knowledge, tools and skill set I have been fortunate to realize that individual needs change from person to person, business to business, culture to culture, and that every request is important to you. For that very reason, when I embark on a journey, I work closely with you, whether you are buying or selling a home or commercial space, whether it is a tradition sale, short sale or foreclosure. I will help you as I am highly motivated, results driven and have taken time to research the marketplace, trends and opportunities to know how to best serve you. With my experience, culture and languages, you can rest assured that your best interests are my priority. I will help you find the home or property of your choice and professionally negotiate on your behalf. It is for these reasons that so many of my clients refer me to their friends and families. The Valley of the Sun has been one of the fastest growing U.S. metropolitan communities, Phoenix has grown tremendously over the past couple decades. Financial Institutions are working with Americans, offering terrific mortgage deals, as well as with foreign investors who are interested in purchasing second homes… the opportunities are endless. My mission and goal is to provide you with superior service. Welcoming new residents to Arizona including Americans and International clients who want to relocate permanently, a home away from home or to escape cold winters, is a pleasure! I enjoy meeting new people and always set my goals high and strive to achieve them. If you’re ready to search for the perfect property, I am here to show you the very best homes that meet your criteria.
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