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:
- Other payments are being missed, but mortgage payments are current.
- All accounts are in good standing, but credit cards are maxed out due to living expenses.
Hardship requirements on the Form 710 are met.
Taking the Short-Sale Listing
Non-GSE Traditional Short Sale
The required paperwork to verify financial hardship will vary, depending on the servicer. If you cannot download the paperwork required from the servicer’s website, you can begin the discussion of financial hardship using the Form 710. The information is very similar and can be easily transferred to the servicer’s form from the 710.
FHA Streamlined Pre-Foreclosure Sale (PFS)
Principal residences, second homes, and investment properties are potentially eligible for FHA’s Streamlined Pre-foreclosure Sale (PFS) program, which does not require verification of financial hardship, provided that borrowers/sellers meet all program requirements. Note that such properties may be vacant but cannot be condemned.
For non-owner-occupants (borrowers/sellers who do not occupy the home):
- The borrower/seller is 90 days or more delinquent on their FHA-insured loan as of the date of the initiation of the short sale (the servicer’s review);
- The borrower/seller has a credit score of 620 or below.
For owner-occupants (borrowers/sellers who occupy the home):
- The borrower/seller is 90 days or more delinquent on their FHA-insured loan as of the date of the servicer’s review.
- The borrower/seller has a credit score of 620 or below; and
- Except for military service members with permanent change of station (PCS) orders who meet the requirements for an FHA Streamlined PFS, owner-occupant borrowers/sellers must have been reviewed for loss mitigation home retention options. Servicers may only offer an FHA Streamlined PFS or deed-in-lieu of foreclosure to owner-occupant borrowers/sellers when one or more of the following conditions have also been met:
- The borrower/seller has defaulted on a trial payment plan within the last six months;
- The borrower/seller has defaulted on an FHA-HAMP or standard (rate-and-term) modification within the last two years.
- The borrower/seller has been deemed ineligible for a permanent home-retention option.
- The borrower/seller received a special forbearance but did not otherwise qualify for a permanent home-retention option by the end of the forbearance period.
FHA Standard PFS
- Only owner-occupied properties are eligible for the standard pre-foreclosure sale, no “walk-a ways” or investment properties.
- Exceptions: when it is verifiable that the need to vacate was related to the cause of default (job loss, transfer, divorce, death), and the subject property was not purchased as rental investment, or used as a rental for more than 18 months.
- The servicer must verify the borrower’s/seller’s monthly net income and monthly expenses in order to calculate the Deficit Income Test (DIT).
- The borrower/seller must provide documentation substantiating a reduction in income or an increase in living expense, and documentation that verifies the borrower’s/seller’s need to vacate the property (if applicable).
VA Compromise Sale
VA will consider a Compromise Sale when one of the following financial hardships exists:
- Veteran/seller experiences employer or financial situations that requires him/her to relocate
- Decrease in income
- Major medical expense
- Death of a principal wage earner, spouse, or family member
The seller/borrower must first obtain a sales contract in order to be considered for the program. Again, for the purpose of verifying the borrower’s/seller’s financial hardship, listing agents can start with Fannie Mae Form 710.
Regardless of whether the servicer uses the Form 710 or something similar, they will almost always require a hardship letter be submitted. The goal of the hardship letter is to have the borrower/seller explain their situation. Note that borrowers/sellers should not say that they “wish we could keep the house.” (This could trigger the servicer to try to do a loan modification and delay the short-sale process.) The hardship letter should communicate three key points:
- I’m sorry.
Here are my circumstances (such as job loss, medical issues, divorce, health issues, damage to the property not covered by insurance).
I have exhausted all of my options and the only next step is letting the property go to foreclosure.
Verify the Payoff Amount and Estimate Equity
Distressed borrowers/sellers may be reluctant to volunteer any information about their financial position. It is critical that you have an accurate assessment of what their equity position is or isn’t.
Additionally, there are times where borrowers/sellers have no idea of the costs involved in the sale of the property and they may think they have enough equity but they do not. It is important for you to verify with the servicer what their payoff is to accurately estimate the borrower’s/seller’s costs. If the property is in a homeowners’ association, listing agents must verify whether the borrower/seller is current with their association fees or what may be owed.
When you do an estimate of equity for your borrowers/sellers, there may be situations where borrowers/sellers may choose to bring cash to the closing to avoid the ramifications of doing a short sale. If this is the borrower’s/seller’s choice, caution should be taken to ensure the borrower/seller will bring all the funds to the closing. In most states, there are no lien rights for unpaid brokerage fees on a residential sale. A borrower/seller could have enough money to cause the transaction to close (bring enough to pay off mortgages and other expenses of the sale) and not have sufficient funds to pay brokerage fees. The transaction would still close and the listing office would owe whatever compensation was published in the MLS to the selling office. A brokerage should have a company policy on how to ensure funds will be at closing in these situations.
It is important that the listing agent have a frank conversation with the borrower/seller about all liens on the property as well as a discussion about available assets as a condition of short-sale approval may require the borrower/seller to contribute some cash at closing. Consider using the Pre-Listing Worksheet and the Seller’s Equity Calculation Worksheet, on the following pages.
Borrower’s/Seller’s Willingness to Submit All Information and Documents
According to a member of Freddie Mac’s Fraud Investigation Unit, short-sale fraud is “any misrepresentation or deliberate omission of fact that would induce the lender, investor or insurer to agree to the terms of a short sale that it would not approve had all facts been known.”
Examples of potential short-sale fraud may include:
- Valuation manipulation
Less than an “arm’s-length” transaction
Abuse of the “pending” status in the MLS
- The borrower/seller causing harm to the property by trashing the property. Often the term used for this is creating “waste”.
Reporting potential fraud:
1-800-2-FANNIE (1-800-232-6643) Or complete the Suspected Fraud Submission Form at: https://fims.secure.force.com/MortgageFraudReport/