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Short Sale Handing Over Keys

What is a short sale?

The Pre-foreclosure Stage

The definition of a short sale is when the lender on the property agrees to accept less than the total amount owed on its debt and agrees to release its lien on the property.

1) If there is more than one lender involved, all must agree to the terms of the short sale transaction or else it can not successfully close.

2) Lender's options with regard to unpaid debt:

  • forgive the remaining balance
  • does not forgive the remaining balance
  • requires the homeowner to sign an unsecured promissory note for the remaining balance
  • * in case of non-recourse debt, the lender must agree to forgive the balance in an approved short sale

B. Parties involved

  1. Borrower
  2. Listing Agent - most significant role, facilitates the process
  3. Loss Mitigation Department - need to identify key contact at bank
  4. Buyer/Buyer's Agent
  5. Additional lien holders & their loss mitigation department (if any)
  6. Trustee
  7. BPO - key to the shot sale approval
  8. Appraiser
  9. Title company or escrow
  10. Buyer's Lender (if the purchase will be financed) 

C. Basic short sale rules

  • Typically the loan must be in default (at least 30 days late; however there are exceptions)
  • There must be reasonable hardship to prove on behalf of the borrower
  • The Borrower receives zero proceeds from the sale
  • Junior lien holders must agree to take significantly less per lien
  • The homeowner must vacate the property
  • Arm's-length transaction - buyer cannot be related to the borrower

Some lenders will have specific rules in regards to short sales in addition to the above-referenced general rules.

  • In order to qualify for a short sale, the borrower must be in default for a specific minimum period of time.
  • VA loans generally discount up to 88%-91% of the appraised value
  • FHA loans can only be reduced to 82% of the appraised value
  • Conventional loan discounts vary on a case by case basis
  1. PMI - if there is Private Mortgage Insurance on a loan, then the PMI company has the control over the exact amount to be discounted.
  2. If Fannie Mae (FNMA) or Freddie Mac (FRMC) is the investor behind the loan, they also have the "final say"

D. Benefits of Short Sales

  • The Homeowner is able to sell the home without any "out-of-pocket" costs
  • The Homeowner is saved from foreclosure and can move on with future life due to faster credit recovery
  • The borrower is more in control of the situation in case of a short sale
  • Relief from stressful condition

 

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