If you have come to the point where you can no longer afford to make your mortgage payments, you’re probably thinking about selling your home. This can be a tough decision. But if you believe your lender may start foreclosing, selling may be your best option.
This is part one in a series of posts we’re publishing on the topic of short sales.
Here are some things you need to know.Underwater v. Equity
If you’ve decided to sell your home, you need to know whether you have equity in the property or whether the property is underwater. Having equity means the market value of your home is greater than the outstanding balance of all liens on the property—that is, your mortgage loan, any second mortgage or home equity loans, plus other liens, such as tax liens or Homeowners Association dues.
If you have equity in the home, you can sell your home and fully pay off your mortgage from the proceeds of the sale. You will have money left over after the sale because the mortgage will have been fully satisfied.
Being underwater means you owe more on the home than the property is worth. If you sell an underwater property, you won’t be able to pay off the mortgage with the proceeds of the sale.The relationship between underwater properties and foreclosure
Just because a property is underwater doesn’t mean it’s in foreclosure or even likely to go into foreclosure. Many homeowners stay current on their mortgage while the property value goes down, making their home underwater but their mortgage current.
On the other hand, many homes that go into foreclosure are also underwater.
Homes often are underwater because the homeowner is unable to continue making mortgage payments. Their debt grows past their property’s value because they’re unable to keep up with payments.
If you are in default and want to sell your underwater home, you likely have to complete a short sale.
If you sell your home short, your mortgage lender won’t receive the full amount you owe them. So the lender has to give approval for you to be allowed to complete a short sale. You will need to ask your lender for permission to settle your debt from the proceeds of the sale of your home.
12 steps to a short sale
- List the property. There is an art to listing short sale properties. Lenders want to approve short sales that have been tested on the market at the highest possible price points. They want to ensure that your short sale offer is the highest value they will be able to receive for the property.
- Building a strong listing history is important. To do this, you need to be able to show that you’ve tested the market. Putting a property up for a few days and then taking a low offer will not satisfy the lender. They will think you didn’t try for the highest offer and it will make the negotiation process more difficult. List the property at fair market value and then drop the list price gradually each week so when an offer comes in, it’s clear the offer came in at the highest possible value.
- Sign the offer. Unless your investor is FHA, lenders don’t take short sale requests seriously unless you have a buyer for the property:
- Make sure your agent takes the highest offer. The lender’s only priority is receiving the most money possible for the property.
- Have valid proof of funding for the entire purchase price of the property. If your buyer is taking out a loan, they must have written documentation from their lender (a buyer pre-approval letter) stating the loan amount. They must also be able to prove that they have all the remaining cash needed to close.
- Create a settlement statement. A settlement statement (sometimes known as a HUD-1) is a document that allows you to present your offer to the lender. Selling a home involves fees (including escrow fee, title fee, property taxes, excise tax, realtor commission, etc.). In an equity transaction, the seller usually pays their fees but when the home is underwater, the lender acts as the seller and absorbs the cost of the fees. Lenders must approve the fees in order to approve the sale. The HUD shows the lender: The purchase price of the home; the proposed fees to be paid to close the short sale transaction; and the minimum net (the amount of money the lender will receive after the fees are taken out of the transaction).
- Initiate negotiations with your lender. Send a full financial package, settlement statement, and offer documents to the lender. Put your name and loan number on every page. Include a fax cover page that says you want to be reviewed for a short sale.
- Provide lender-specific documents. Some lenders have specific documents required for initiating a short sale (including Bank of America, Wells Fargo, Nationstar Ditech, Chase and SLS). If you need to know what these documents are and where to find them, call us and we’ll help you.
- Equator. Some lenders (including Bank of America, Carrington, Chase and Nationstar) use a system called Equator to negotiate their short sales. You need someone with an Equator account and experience with Equator to help you negotiate these. Call us if you’re trying to initiate a short sale with one of these lenders.
- The lender reviews and approves your financial hardship. Lenders only approve short sales if they believe you have gone through a genuine financial hardship. They look at your income, bank statements and tax returns to determine this. You will have to submit a hardship letter explaining why you are unable to pay your mortgage. Be prepared to submit full information about why you fell behind on your mortgage. The lender may ask you questions about the information you provided. Answer them in writing as quickly as possible.
- The lender conducts a Broker’s Price Opinion (BPO) of the property. The lender wants to make sure that the home is being marketed and sold at fair market value (FMV). To make sure, the lender will hire an appraiser to visit the property. They will conduct an interior BPO of the property and report their value to the lender. The lender will compare this value to the value of the offer you submitted.
- The lender responds to the offer. The lender will respond to the offer you submitted by either accepting it or countering it. There are a few types of counteroffers:
- Countering purchase price and fees. If the lender believes the value of the home is under the FMV and wants changes to the fees on the settlement statement, they may counter the purchase price and the fees. They will tell you the purchase price they want to get and what fees they’re willing to pay for.
- Countering only purchase price. Sometimes, before the lender will respond to the fees on the settlement statement, they need to get an offer at FMV. Lenders will tell you your offer is under the value and they will counter the offer. This is where you need an experienced negotiator to help you know whether the buyer should raise the offer or whether the lender is asking for too much money.
- Countering fees. Sometimes, the lender agrees to the purchase price you submitted. They believe the offer is reflective of FMV and they only have a response to the fees requested on the settlement statement.
- Note: Very rarely do lenders accept the original offer and original settlement statement as-is. Short sale negotiation is mainly about negotiating price and fees that will work for the buyers, the sellers and the banks.
- The lender issues an approval letter. The lender will approve the short sale in writing. The letter will contain the minimum net proceeds needed to approve the sale, the approved fees, and deficiency waiver language (see below). The approval letter will likely have an expiration date 30-45 days from the date it was issued and will contain closing instructions. This letter allows you to officially move to closing. Escrow becomes involved with the transaction at this time.
- The buyer completes an appraisal of the property (if needed).
- The mortgage loan originator (MLO) gets the buyer financing. The buyer’s lender underwrites their loan. If the buyer is paying cash, there is no MLO involved and this step is skipped.
- The lender issues Final HUD Approval. After the 30-45 period runs and the buyer’s loan is ready, the lender will see the final settlement statement prepared by the escrow agent. They will give their permission for the short sale to close.
- Note: Your fees at closing (when the escrow agent sends the HUD) must match or be less than the fees that were approved in the approval letter. Most lenders will not allow the property to close if you’re requesting fees that were not originally negotiated.
- The short sale closes. Ownership changes hands and you move out of the home.
A short sale can be a very complicated process. Not all real estate agents are experienced in this type of sale. (We have some recommendations, if you need one.)
It’s always a good idea to have an experienced attorney on your team when you begin to negotiate with your lender. We would be happy to help you with your specific situation. Please call 1-800-603-3525 right now, or fill out this form for a free consultation with one of our attorneys.