WHY WOULD A SELLER OR LENDER FIND A SHORT SALE APPEALING?
Homeowners benefit by avoiding the long-term negative consequence to their credit which are associated with a foreclosure. Lenders benefit because they can avoid the substantial expense of a foreclosure proceeding. Most lenders do not want to own the properties used as collateral for their loans, because the maintenance cost and taxes add to their cost and decrease profitability.
WHAT ARE THE FIRST STEPS?
The agent and seller should start by having an extensive, truthful discussion about the seller’s financial status. People who are in financial trouble may be hesitant to discuss the details of their unfavorable situation, but honesty and full disclosure are essential to the successful closing of a short sale transaction. The seller should contact the lender to find out whether the lender is willing to consider a short payoff arrangement. The process of convincing a lender to reduce its loan balance to close the transaction is often challenging, requiring the negotiating skills of a seasoned agent. Be mindful of the additional work that short sales require of both the agent and the seller. Ask your Escrow Officer to prepare a “net sheet” as soon as possible and update it regularly as information becomes available. This is a detailed estimated statement of the payoffs including closing costs that will be charged to the seller at close of escrow.
WORKING WITH THE LENDER
Determine the lenders guidelines. You can anticipate a very specific list of required documentation that begins with a copy of the Listing Agreement or some other form of written authorization from the seller. Additional requirements include:
- Strong evidence of financial hardship to the lender
- Pay stubs or other proof of current income flow
- 2 years of Tax Returns and W-2’s
- Latest personal checking account statement
- Copies of all past due secured and unsecured debt notices
- Copies of the latest mortgage statement
- Copy of the current tax bill
- Copy of a current appraisal, including comparable's sales in the area
- Copy of the purchase agreement
THE ESCROW PROCESS FOR A SHORT SALE
A short payoff is a condition of closing that must be specified in both the Purchase Agreement and Escrow Instructions. When the lender’s payoff demand is received in escrow, it is likely to include restrictions on closing costs and payoff amounts to other lenders and creditors. Throughout the escrow process, the seller and real estate agents should be proactive about the numbers that the lender will see. Your Escrow Officer can advise you immediately of any significant changes or discrepancies. Remember that the lender will establish a minimum payoff figure which it is prepared to accept, and its willingness to adjust that final figure may vary.
HOW IS THE SELLER'S CREDIT EFFECTED BY A SHORT SALE?
According to David Steep, division manager at Vitek Mortgage, sellers will a bigger hit on their credit report by going through foreclosure. Steep says the points lost on a FICO score (the formula used to assess a borrower’s risk factor) are as follows:
- Foreclosure of Deed-in-Lieu of Foreclosure
Both of these solutions affect credit the same. Sellers will take a hit of 250 to 280 points. This means if a seller’s FICO score before foreclosure was 680, it could dip as low as 400.
- Short Sale
The affect of a short sale on a seller’s credit report is much less damaging. The ding on credit will show up as pre-foreclosure in redemption status, Step says, which will result in a loss of 80 to 100 points. This means a short sale with a previous FICO of 680 will see it fall to 580 to 600.
WAITING PERIOD BEFORE BUYING ANOTHER HOME
- Foreclosure or Deed-in-Lieu of Foreclosure
Steep says a seller who wants to buy another home after foreclosure will end up waiting about 36 months before a lender will offer any kind of interest rate that makes sense.
- Short Sale
The good news for short sale sellers is the wait is much shorter before buying another home. They can buy again in about 18 months at a reasonable interest rate.
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