Each non-recourse state has its own anti-deficiency statutes that prohibit lenders from seeking judgments. In some states, non-recourse laws apply only to purchase-money loans (i.e., original home loans that are used to purchase property). Almost all home equity lines of credit (HELOCs) and home equity loans are considered recourse loans and lenders may sue borrowers to recoup their losses.
Listing agents should have knowledge of the recourse laws in their state and counsel the borrower/seller to speak with their accountant or attorney about the specific issues surrounding their situation.
Borrowers/sellers who are pursuing a short sale may want to know how a short sale or foreclosure will affect their credit score. The answer is impossible to specify the exact number of points by which a short sale or foreclosure will lower their credit score.
Credit-scoring algorithms are complex and take into consideration a number of factors, including, but not limited to, the following:
- Payment history
- Amount of debt compared to credit limits
- Length of credit history
- Number of credit inquiries
- Number of credit accounts
- Types of credit accounts
When calculating an individual’s credit score, agencies compare the information to the loan repayment history of consumers with similar profiles. Figure 2.3 is a general guideline and is not intended to predict how an individual borrower’s/seller’s credit would be impacted by any of these events.
Note: Estimates assume all else held constant over time (e.g., no new account openings, no other delinquencies, similar outstanding debt)
Waiting Period to Finance the Purchase of Another Home
- If you’re the listing agent and your borrower/seller client is pursuing a short sale. Your clients may want to know how long they need to wait before they can finance the purchase of another home.
- Please note that this information is subject to change and you should always keep yourself up-to-date on any changes made by the GSEs, FHA, VA, or individual lenders/investors.
The answer depends on a number of factors. The following list shows the current waiting times for different types of mortgages.
Determine whether or not there is a valid financial hardship
- Whether the borrower/seller has missed payments or not, having a valid financial hardship is a requirement for lien holders to accept less than what is owed on a property. Many real estate professionals have made the mistake of taking a listing and marketing it as a short sale only to find out later that the investor will not approve the transaction due to the borrower/seller not having a valid financial hardship..
- Some borrowers believe that walking away from the financial mortgage obligations without a valid financial hardship is in their best financial interest long term. Strategic default is a term used to describe the situation when borrowers choose not to make their mortgage payments even though they are financially able to do so. If borrowers/sellers indicate that they are considering a strategic default, real estate professionals should NOT become involved in the transaction. As stated in the previous chapter, real estate professionals should NOT counsel borrowers to stop making payments on their mortgage.Walking away from one’s mortgage and debt obligation and allowing the home to go to foreclosure may have serious consequences for the defaulted borrower’s credit and the potential for a deficiency judgment, depending on the state where the borrower resides, not to mention the real estate values of neighboring homes.
Determine who owns the loan(s)
- Determining the investor that owns the loan (or investors if there is more than one loan) is important because the investor establishes how the servicer will process the short sale.
- Depending on the investor, the short-sale process may be very orderly. With some investors, however, the short-sale process may be incredibly undefined and tricky for listing agents and borrowers/sellers to navigate.
- For example, on some short sales, the short-sale approval process doesn�t begin until the seller has a contract on the property.
- Note that the investor�s servicer may have processed a previous short sale one way does not mean the next short sale will be handled the same way; it all depends on the investor and the guidelines the investor has set into place to process the short sale.
Don’t Forget to Contact the Private Mortgage Insurance (PMI) CompanyIt is important to determine if there is PMI on the loan at the time of taking the listing to factor in the time it will take to obtain the PMI company’s approval of the short sale. Some of the lenders/investors have delegated authority from the PMI companies to proceed with the short sale. Just as each servicer has its own process and time frame for short sales, so do PMI companies.Therefore, the listing agent must determine with the servicer what their arrangements are with the PMI company. The original loan documents will show if there was PMI at the time of the purchase. If there was not and the original down payment was less than 20%, the listing agent should ask the servicer if there is MI since the investor/lender could have taken out the insurance. In a recourse state, the PMI company has the ability to pursue a deficiency for the amount that is 20% of the loan amount less the down payment.
listing agents should alert borrowers/sellers to obtain a release of deficiency from the PMI company at the time of seeking approval of the short sale.
- MakingHomeAffordable.gov is a useful government website for determining if a borrower’s loan was purchased by Fannie Mae or Freddie Mac. (This website also provides contact information for more than 100 mortgage companies participating in HAMP.)
- Although we will be covering the steps involved in doing a short sale following the Fannie Mae and Freddie Mac guidelines, most large lenders and many mid-sized and small lenders follow the same procedures. If you find the loan is not owned by either Fannie Mae or Freddie Mac, the listing agent or the borrower/seller will need to contact the servicer to determine how to proceed with the short sale. Each type of short sale is handled differently, and who the investor/owner of the loan is will determine how the transaction will proceed.
Determine whether or not there is adequate time to complete a short sale
- Determine whether or not you have enough time to get the short sale done.
- Verify with the borrower/seller whether a notice of default (NOD) has been issued and/or if a foreclosure sale date has been set. This will give you the time parameters you need to effectively meet the needs of the borrower/seller client.
- Remember, foreclosure timelines vary from state to state. There is no hard-and-fast rule as to how much time is enough time.
- Discuss with the servicer how they will handle the foreclosure timeline while the property is on the market.
Contact the servicer/investor and request or download all forms
- The names of the required forms may vary. For example, with loans owned by Fannie Mae and Freddie Mac, the required forms can be found in the Borrower Response Package. With VA loans, the required form is the Compromise Sale Agreement Application.
Have the borrower/seller sign an authorization to release information form
- As part of the initial paperwork that needs to be completed, be sure to ask the borrower/seller to sign an authorization to release information form, which is usually found on the servicer’s website. The servicer cannot discuss the borrower’s loan with you without this signed release. If a release form is not available at the servicer’s website, click “Download” for a sample form.What_Real_Estate_Professionals_Need_to_Know
Verify the borrower’s/seller’s financial hardship
- Verifying the borrower’s/seller’s financial hardship is a critical step in listing a short-sale property. The Fannie Mae Form 710 is an excellent tool for communicating financial hardship to your borrower/seller. Even if the servicer does not use the Form 710, the information the homeowner will have to submit is virtually the same for all short sales.Note that the listing agent should discuss with their borrower/seller what the borrower/seller will allow to be disclosed to the buyer relative to their financial hardship. Often, the listing agent will make page 2 of the Form 710 available to the buyer for this purpose. A diligent buyer’s agent should be determining whether the seller has a verifiable financial hardship since history has shown that many short sales have failed due to the borrower/seller not have a hardship.
After verifying the financial hardship, ask the borrower/seller to write a hardship letter
Determine the payoff amount and estimate equity
Fannie Mae and Freddie Mac will allow a streamlined short sale if the borrower/seller is more than 90 days’ delinquent, their mortgage is not secured by an investment property, and either (1) their FICO score is 620 or less or (2) their debt has been discharged due to Chapter 7 bankruptcy. With the streamlined process, the borrower/seller will not have to provide additional documents to prove a valid financial hardship, however, the borrower/seller will still need to complete the Form 710.
2. If the borrower/seller does not meet the streamlined criteria, the short sale will be processed with additional paperwork requirements of the Form 710. Note that submitting the Form 710 prior to having a contract on the short-sale listing begins the pre-approval process for Fannie and Freddie Mac. The pre-approval process will be either streamlined or standardized, depending on the borrower’s/seller’s current financial situation.
For Fannie Mae and Freddie Mac Streamlined Short Sales, borrowers/sellers are not required to be delinquent. At a minimum, they must be at risk of imminent default, which is defined by Fannie Mae as a loan that is not yet in default and where there is a very high probability of being in default soon. This option is available on owner-occupied housing only.
Examples of imminent danger of default could be:
Obtain a preliminary title report
- Obtaining a preliminary title report should show what types of liens are on the property that need to be cleared prior to closing such as:Note that ordering a preliminary title is a requirement for a VA compromise sale.
- Second mortgages
- HELOCs, municipal liens
- Homeowners’ association liens
- IRS or state tax liens
- Local property tax liens
- Mechanics’ liens
- Be certain to access any sources that can help you determine any liens or encumbrances on the property. This might be done through public records or your MLS system if it is connected to a database that has this information. If your MLS participates in Realtors Property Resource, RPR® is a valuable tool for determining liens and encumbrances.
- If there are multiple liens on the property, it can make it more difficult to complete the short sale. All investors must agree to the transaction and if just one of them says “no,” the entire transaction will fail.
- In lien priority, when a property sells in a short sale, the first lien holder gets paid before the second lien holder gets a penny. Most first lien holders will allocate some of the money from the transaction to be paid to the second lien holder. The problem is that often it is not enough to satisfy the lien holder in the second position.
- Although it seems that if the same servicer has both mortgages it would be easy to get the bank to agree, it is common for first and second liens serviced by the same bank to be controlled by different investors who have different negotiating positions.
- If the seller has an IRS tax lien, it will take time to get it released. All the IRS will do is release the lien on the property to allow it to sell. The IRS not release the judgment against the seller. Your seller will need ample time (often six to eight weeks) and may need their attorneys’ involvement to accomplish this.
Complete initial listing paperwork
- Borrowers/sellers should sign a listing agreement; a short-sale disclosure form; a listing agreement addendum, if one is available from either your association or your broker; and an authorization to release information form (as outlined earlier) that allows you to speak directly with the servicer as the listing agent.
- Borrowers/sellers are required to complete the federal lead-based paint disclosure on residential properties built prior to 1978 as well as any additional state-specific mandated disclosures that are required.
- Confirm with your client’s mortgage servicer that there is enough time before foreclosure to complete a short sale.
- The steps involved in taking the listing and the information required by the servicer at the time of listing will depend on the type of short sale you are doing. Some servicers require paperwork prior to listing, some require that you put the property on the market and adjust the price if needed, and others will not initiate the short-sale process until there is a contract on the property.
- Follow servicer protocol in completing additional documentation
- At the time of taking the listing, listing agents should submit a completed Borrower Response Package to the servicer. The Borrower Response Package consists of:
- Completed Mortgage Assistance Application (Form 710)
- Income documentation as outlined in Form 710 based on income type
- Hardship documentation as outlined in Form 710 based on hardship type
- Short Form Request for Individual Tax Return Transcript (IRS Form 4506T-EZ) or a Request for Transcript of Tax Return (IRS Form 4506-T) signed by the borrower
- With a Fannie Mae Standardized Short Sale, the servicer will be involved in setting the price for the short sale. With Fannie Mae Standardized Short Sales, you may be putting the property on the market at its fair market value before receiving the price from the servicer. The borrower/seller does have the option, however, of waiting until the servicer has responded with a price before putting the property on the market. If the borrower/seller chooses to wait, listing agents should:
- Have the seller sign a listing agreement and an MLS Exempt form. Ensure that the seller has sufficient time prior to any forced sale to wait to market the property
10. Commission concerns
Offer of Compensation
As in all real estate transactions, the commissions a brokerage company charges and the amount of compensation a listing office chooses to offer cooperating brokers is a business decision made by each firm, independent of each other. Although sellers are responsible for the compensation that has been agreed to in the listing agreement, investors that approve short sales are not legally responsible for payment of any commission.
If your MLS requires that listing brokers disclose a short sale or potential short sale in the MLS, the listing broker may also choose to explain to other MLS participants how any reduction in the gross commission, required by the investor as a condition of approving the sale, will be apportioned between listing and cooperating participants. As a reminder: The seller’s permission is required prior to disclosure in the MLS of the potential short sale—regardless of your MLS requirement for disclosure.
- Fannie Mae, Freddie Mac, and the U.S. Treasury HAFA Short-Sale programs provide that servicers will pay a commission as contracted in the listing agreement, up to 6 percent of the final sale price.
- When a real estate licensee is a party in a short sale, the transaction is not at arm’s length, so the licensee may not receive commissions.
- Real estate licensees may not have any side deals (including “gifts”) to receive a commission indirectly.
- A broker or agent may only earn a commission if the represented party is unrelated and unaffiliated.
In addition to these guidelines, many experienced short-sale agents and brokers have indicated that it is virtually impossible for a listing agent who also represents the buyer in the transaction to obtain both a listing and selling side of the compensation from the lender or servicer. However, lenders and servicers will generally allow both sides if two agents from the same brokerage are involved in the transaction. It is important that you make the servicer aware of the two agent/same brokerage situation if it occurs.
Borrowers/sellers who are in mortgage default or facing foreclosure may argue that they cannot afford to pay them. Real estate professionals should note:
- Attorneys who work with distressed borrowers/sellers may take into consideration their current financial constraints and allow for ways to navigate the process with little or perhaps no attorney fees upfront. In most cases, reasonable attorney fees can be included in the cost to close the short sale. Each short-sale program and/or servicer has their own guidelines.
- It is prudent for the borrower/seller to hire an attorney as legal issues often arise in a short-sale transaction and real estate professionals cannot advise the borrowers/sellers