The First Step is to Identify Your Short Sale Type
The first step in a short sale is to identify your type of short sale.
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Before pushing your agent to slide that short sale listing into MLS, it’s a good idea to stop and think about the first step in a short sale. Sellers get overly anxious. And it’s no wonder. Many of them have been trying in vain to do a loan modificationor work out some other kind of financial arrangement with their bank, and they’re worn to the bone, frazzled. They want to be put out of their misery.
Because of the intensity and frustrations inherent in situations with an underwater home, it can be difficult to have patience. You might be tempted to skip that first step of short sale and jump directly to accepting offers. But you’d probably be making a huge mistake.
Take That First Step and Identify Your Short Sale
The secret to identifying your short sale lies with your bank and the type of loan secured to your home. The first thing to do is to call your bank and ask what kind of loan you have. Find out if your loan is owned by that bank or if it is owned by another bank and yours is merely the servicing entity.
Do you have more than one loan? Will you face a deficiency judgment? You may need to get legal advice.
Depending on your type of loan and your situation, you will then choose your type of short sale.
First Step to Choosing Your Type of Short Sale
Every short sale is different. If you choose the wrong short sale, you could face personal liability, and you might be losing out on relocation funds. Here are a variety of short sales that you might qualify to do, based on your type of loan and personal situation. You really should not move forward on a short sale until you have completed this first step. Which type of short sale will you do?
- HAFA Short SaleA HAFA short sale is available only to sellers of a personal residence who have a severe financial hardship and limited cash assets. It’s designed to streamline the short sale process, release sellers from liability and provide relocation assistance. There are 2 basic types of a HAFA short sale: a preapproved HAFA or a HAFA short sale request along with a purchase offer.
- Fannie Mae HAFA Short SaleUnlike a traditional HAFA, to qualify for a Fannie Mae HAFA, you must live in the home or have moved more than 100 miles away. You can’t move across town and apply for a Fannie Mae HAFA. Your mortgage payment must exceed 31% of your gross monthly income. There is a dollar limit on cash reserves as well that does not apply to a regular HAFA. And the government might decide it’s more profitable to foreclose on you.
- Freddie Mac HAFA Short SaleFreddie Mac wants you to be 60 days delinquent on your mortgage payment. Many Government Sponsored Entities insist that you stop making your mortgage payment. Freddie would like your mortgage payment to exceed 31% of your gross monthly income, but that is not a solid requirement, unlike a Fannie Mae HAFA short sale.
- Fannie Mae Short SaleI’ve yet to close a Fannie Mae short sale in which the seller is current. Every single one I’ve done, Fannie Mae won’t consider the short sale until the seller agrees to stop making mortgage payments. Getting Fannie Mae approval adds an extra layer to the short sale process and can extend that time for approval by 2 weeks to 30 days.
- Freddie Mac Short SaleEvery bank handles a Freddie Mac a bit differently. Generally, banks servicing a Freddie Mac loan want a 4506 and an 1126 form. The 4506 lets the bank order copies of your tax returns, and the 1126 is a financial statement. Freddie Mac might want to see that your loan is in arrears, as well. Hey, it’s the government. The government wants you to stop making your payments. Isn’t that great? Not.
- Traditional Hardship Short SaleIn a traditional short sale, your hardship letter will be closely examined. You will also have a better chance of walking away if your loans were originally purchase money loans. Those two combinations make for a successful and pretty much stress-free short sale, if there is such an animal.
- Strategic Short SaleOne institution that stands out because of its cooperative short sale program is Bank of America. In a Cooperative Bank of America short sale, the bank preapproves the purchase price and the seller, and negotiates a seller contribution in advance, before your home goes on the market.
It is a myth that a seller must face a financial hardship to do a short sale. However, if you have no hardship, plus you have a hard-money loan, you will probably pay a lot more than for simply no hardship at all. It’s like having two strikes against you.
- Mortgage Insurance Short SaleIf your loan has mortgage insurance, MI will add another layer to the process. The mortgage insurance company will be required to approve or reject the short sale. Bear in mind that the mortgage insurance company will pay either way — foreclosure or short sale — and it might get paid more to do a foreclosure. I’d say the odds are about 50 / 50. With any luck, your MI will have gone out of business. The basic risk with MI is it might want a contribution, either a prom note or cash to approve.
- Two Loans on a Short SaleThe best thing to say about two loans on a short sale is at least there is probably no mortgage insurance. Depending on the type of second loan, though, the lender may or may not be willing to cooperate. Its PSA could provide a greater financial incentive for foreclosure than a short sale, but in my experience those situations are rare. Generally, the second quietly snatches its $3,000 and crawls away.