I’ve written many articles over the years about short sales and how they work. We’ve spent a considerable amount of time detailing how a short sale is packaged, who is qualified, and what the benefits and risks are to both the homeowner and the lender. This time we will detail the process of the short sale from the time an offer is accepted on the home, until time it closes.
The first thing that we need to realize is that once all of the borrower’s financials are collected and packaged, nothing can be done with them until an offer is received and executed on the home. Many homeowners are anxious to get their package in to their lenders, in order to get processing started. However, what most homeowners don’t realize is that the lender can not process any paperwork until a fully executed offer is received on the home. There are, fact, very few lenders who will even respond to communications without an offer on the table. So, the first thing we need to realize is that short sale processing does not begin until an offer is fully executed on the home.
Once a completed short sale package is sent to the borrower’s lender(s), there are a series of steps that must be completed, and involve no less than six individual entities or departments.
The first step that the lender will take is to review the package carefully for any missing or incomplete documents. This is called the document preparation stage. The stage usually takes from 10 to 15 days to complete, and contact will be made with the listing agent regarding any missing or incomplete documents. This is also the stage at which an order will be placed by the servicing lender to determine fair market value of the home with an independent opinion of value, performed by either a licensed appraiser, or a licensed real estate agent. Once this valuation and document review is complete, the file will move to a “negotiator” or “underwriter”.
Once the file has been cleared for completion, it is sent to an underwriter or negotiator for review. This person’s job is to review the package carefully to determine several key details:
a.) Is all documentation complete and up to date?
b.) Does the financial package demonstrate a valid hardship of some kind?
c.) Is the amount of the offer sufficient for market value?
d.) Is the amount of the offer of within the lenders purview to accept?
e.) Is there a mortgage insurer on the file, and will they sign off on the package?
f.) Who is the “investor” of the actual note, and will they need to sign off on the package?
g.) What are the laws governing foreclosure in the borrower’s state.
h.) Is there a 2nd Lien Holder, and how much money do they want to clear their lien?
i.) Who is the buyer? Are they qualified? Are they asking for concessions? Which concessions are permissable per the lender’s internal policies?
j.) What are the taxes due, and how much will we assume?
k.) Is there an HOA? Are they owed any back payments?
These are just some of the details that must be examined carefully to assess if the deal is plausable for the lender to perform. This “negotiation” process usually takes 2-3 weeks, and contact between the borrower’s lender and their real estate agent should be frequent, accurately tracked, and reported. Remember, if there is also a 2nd lien holder, they also will need to complete this entire process, and the amount of parties involved doubles instantly.
The negotiation process will end with either an approval that all parties agree to, or the short sale is denied, and other options may be examined, or the home may go to foreclosure. In the event that the short sale is approved, a new series of processes will start. This is generally known as the escrow phase.
During the escrow phase is where tradition real estate transaction rules begin. It is during this time that the buyer will conduct their home inspections, process their loan file, if any, and attempt to close the deal within the time allowed by the contract or short sale authorization. The first step here is inspections.
During the inspection phase of escrow, the buyer will hire an independant property inspection company to give an opinion on the overall condition of the home and its various mechanical systems. These inspections are important for a buyer, as they can affect the buyer’s loan processing, and reveal problems that may affect their purchase decision. For example, if the home inspections reveal that the roof is leaking and needs repairs, it is also likely that the buyer’s lender will discover this problem when they do an appraisal of the property. If the buyer is an FHA buyer, they may not be able to complete the purchase without the repairs being completed, as FHA will not insure a home with this problem. Or, perhaps it is revealed that the home’s foundation is cracked, and the repairs will be “astronomically” expensive. The buyer may decide they don’t want the home at all. And they are perfectly in their right to do so, provided they indicate this in writing to the seller before their allotted inspection period expires. However, with a short sale transaction, this process can become complicated. . .
In a short sale transaction, it should be generally understood that the homeowner is in “financial straits,” or would not be short selling in the first place. This could mean that if the buyer does discover defects in the home that will necessitate repairs being made, the seller of the home will probably not be able to financially cover the costs of repair. Therefore, a buyer of a short sale should be prepared to truly buy a home “as is.” If it is discovered that there is something wrong with the home, the buyer will have to either pay for the repairs themselves, or perhaps, they can ask the seller’s lender to pay for the repairs. This would however, require some pre-planning on the part of the seller and their real estate agent.
One of our new strategies at The Realty Butler has been to work with home sellers to get an inspection on the home before it even goes up for sale. This way, any major malfunctions will be able to be addressed and priced for repair. If this is done in advance, the homeowner and agent, working together, can put together repair estimates and photographic evidence of problems that may possibly inhibit the sale. This data is then presented with the buyer’s offer, indicating that as the homeowner has no money, and the buyer also has no “spare money,” for the repairs, the lender will have to authorize the repairs, and pay for them, if they want to short sale the home. If they eventually foreclose on the home, they’ll have to do the repairs anyway in order to sell it then.
These are the major hurdles for both parties to the short sale transaction. It IS very complicated, and can be botched beyond recognition, if all parties are not on the same page. Once these milestones have been passed, the only items left are the buyer’s loan processing, and that is outside the scope of this missive.
Perhaps we’ll cover that next time. . .
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*Disclaimer: We DO provide loan counseling services and process short sales for our clients, but we DO NOT charge fees. Please also remember: I am NOT an attorney, and neither do I play one on TV or the Internet. None of my opinions should be construed as specific legal advice. If you need specific legal advice regarding your personal situation, please ask.