[CE ] Continuing Education 4 hours Real Estate Quiz Course

42 Rules Of Code Of Ethics and Standards Ofr Practice oF The National Association of Realtors

I. Respect for the Public

1. Follow the “Golden Rule” – Do unto others as you would have them do unto you.
2. Respond promptly to inquiries and requests for information.
3. Schedule appointments and showings as far in advance as possible.
4. Call if you are delayed or must cancel an appointment or showing.
5. If a prospective buyer decides not to view an occupied home, promptly explain the situation to the listing broker or the occupant.
6. Communicate with all parties in a timely fashion.
7. When entering a property, ensure that unexpected situations, such as pets, are handled appropriately.
8. Leave your business card if not prohibited by local rules.
9. Never criticize property in the presence of the occupant.
10. Inform occupants that you are leaving after showings.
11. When showing an occupied home, always ring the doorbell or knock – and announce yourself loudly – before entering. Knock and announce yourself loudly before entering any closed room.
12. Present a professional appearance at all times; dress appropriately and drive a clean car.
13. If occupants are home during showings, ask their permission before using the telephone or bathroom.
14. Encourage the clients of other brokers to direct questions to their agent or representative.
15. Communicate clearly; don’t use jargon or slang that may not be readily understood.
16. Be aware of and respect cultural differences.
17. Show courtesy and respect to everyone.
18. Be aware of – and meet – all deadlines.
19. Promise only what you can deliver – and keep your promises.
20. Identify your REALTOR® and your professional status in contacts with the public.
21. Do not tell people what you think – tell them what you know.

II. Respect for Property

1. Be responsible for everyone you allow to enter listed property.
2. Never allow buyers to enter listed property unaccompanied.
3. When showing property, keep all members of the group together.
4. Never allow unaccompanied access to property without permission.
5. Enter property only with permission even if you have a lockbox key or combination.
6. When the occupant is absent, leave the property as you found it (lights, heating, cooling, drapes, etc). If you think something is amiss (e.g. vandalism) contact the listing broker immediately.
7. Be considerate of the seller’s property. Do not allow anyone to eat, drink, smoke, dispose of trash, use bathing or sleeping facilities, or bring pets. Leave the house as you found it unless instructed otherwise.
8. Use sidewalks; if weather is bad, take off shoes and boots inside property.

III. Respect for Peers

1. Identify your REALTOR and professional status in all contacts with other REALTORS.
2. Respond to other agents’ calls, faxes, and e-mails promptly and courteously.
3. Be aware that large electronic files with attachments or lengthy faxes may be a burden on recipients.
4. Notify the listing broker if there appears to be inaccurate information on the listing.
5. Share important information about a property, including the presence of pets; security systems; and whether sellers will be present during the showing.
6. Show courtesy, trust and respect to other real estate professionals.
7. Avoid the inappropriate use of endearments or other denigrating language.
8. Do not prospect at other REALTORS®’ open houses or similar events.
9. Return keys promptly.
10. Carefully replace keys in the lockbox after showings.
11. To be successful in the business, mutual respect is essential.
12. Real estate is a reputation business. What you do today may affect your reputation – and business – for years to come.


Continuing Education 4 hours Real Estate Quiz Course

1. The Code of Ethics is based on the concept of:
c. “Let the Public be served.” Correct!

d. A and B only. Correct!

3. When the Code of Ethics was adopted:
c. there were no real estate licensing laws. Correct!

4. The Code of Ethics was adopted to establish standards of conduct for the real estate industry.
a. True Correct!

5. The Golden Rule is quoted in the Code’s Preamble.
a. True Correct!

6. A listing broker should:
c. suggest a listing price based on comparable market data. Correct!

7. The Code of Ethics protects:
a. the buying and selling public. Correct!

8. The Code of Ethics has three major sections:
b. Duties to Clients and Customers¸ Duties to the Public¸ and Duties to REALTORS®. Correct!

9. Article 2 prohibits exaggeration, misrepresentation, or concealment of pertinent facts.
a. True Correct!

10. Who can file an ethics complaint against a REALTOR®?
c. Both A and B. Correct!

11. Arbitration hearings are often based on:
d. procuring cause disputes between REALTORS® associated with different firms. Correct!

12. The Code requires that REALTORS® respect:
d. exclusive relationships other REALTORS® have with their clients. Correct!

13. The Code prohibits:
a. exaggeration¸ misrepresentation and concealment of pertinent facts about the property or the transaction. Correct!

14. Licensees can generally rely on the statements of the seller (such as in a Seller Disclosure Statement) unless the licensee has reason to believe the information is not true.
a. True Correct!

15. When may a listing broker change her offer of compensation to a cooperating broker?
c. prior to the cooperating broker producing an offer to purchase. Correct!

16. REALTORS® must discover and disclose:
b. adverse factors reasonably apparent to someone with expertise in those areas required by their real estate licensing authority. Correct!

17. Disciplinary action in an ethics hearing can include:
c. a letter of reprimand. Correct!

18. Discipline in an ethics hearing may include:
a. more than one form of discipline. Correct!

19. The ethics enforcement process includes initial screening of complaints by the:
d. Grievance Committee. Correct!

20. If the Grievance Committee concludes potentially unethical conduct may have occurred,
b. they forward the complaint to the Professional Standards Committee for hearing. Correct!

21. Under the Code, a copy of an offer to purchase must be given to the buyer:
c. upon the buyer signing the offer. Correct!

22. The Code requires that REALTORS®’ advertising clearly identify:
a. the member’s professional status or status as a REALTOR®. Correct!

23. The Preamble to the Code:

a. can be the basis for disciplinary action against a REALTOR®.

24. Articles of the Code of Ethics are broad statements of ethical principles and the Standards of Practice support, interpret and amplify the respective Articles.
a. True Correct!

25. A “general” mailing to all homes in an area:
c. is unethical if there is a “for sale” sign on the lawn.


T          F**      1.         The Code of Ethics is based on the “caveat emptor” concept.


T          F**      2.         REALTORS have an obligation to protect and promote the interests of their clients regardless of the effect on any other party or REALTOR.


T**      F          3.         At the time the Code of Ethics was adopted, there were no real estate licensing laws.


T**      F          4.         The Code of Ethics was adopted to establish standards of conduct in the industry.


T**      F          5.         The Golden Rule is part of the Preamble of the Code of Ethics.


T**      F          6.         The concept of “ethics” generally includes some reference to standards, including legal standards and personal moral standards.


T**      F          7.         The Code of Ethics protects the buying and selling public.


T**      F          8.         The Code of Ethics is divided into three major sections, “Duties to Clients and Customers,” “Duties to the Public,” and “Duties to REALTORS.”


T          F**      9.         Under no circumstances may a REALTOR talk to, negotiate or discuss real estate matters with the client of another REALTOR.


T          F**      10.       Only members of the public may file a complaint against a REALTOR alleging a violation of the Code of Ethics.


T**      F          11.       Arbitration hearings are often based on a procuring cause dispute between REALTORS associated with different firms.


T**      F          12.       The Code requires that REALTORS respect the agency relationships that other REALTORS have with their clients.


T**      F          13.       The Code of Ethics prohibits exaggeration, misrepresentation and concealment of pertinent facts about the property or the transaction.


T**      F          14.       Generally, a licensee can rely on the statements given by the seller (such as in a Seller Disclosure Statement) unless the licensee has reason to believe that the information which the seller has given is not true.


T          F**      15.       The requirement to secure agreements in writing extends only to sale contracts and not to changes or amendments to the contract.


T**      F          16.       A listing licensee must be particularly careful not to say anything about the property or the price of the property which might harm the owner’s interests.


T**      F          17.       Disciplinary action in an ethics hearing can include a fine up to $15,000.


T          F**      18.       Discipline in an ethics case may not include more than one form of discipline.


T**      F          19.       The ethics enforcement process includes an initial screening by the Grievance Committee.


T          F**      20.       If the Grievance Committee feels potentially unethical conduct may have occurred, they conduct a hearing to determine whether one or more Articles of the Code have been violated.


T**      F          21.         If a buyer asks you about development on property near your listing, and you have no actual knowledge of surrounding development, you should offer to get specific information or direct the buyer to a reliable source of information.


T          F**      22.       The requirement for accuracy in written agreements extends only to sale contracts (offers to purchase) and not to listing agreements.


T**      F          23.       The Preamble to the Code of Ethics establishes ideals for which all REALTORS should strive.


T**      F          24.       Articles of the Code of Ethics are the broadest statements of ethical principles and Standards of Practice support, interpret and amplify the Articles under which they are stated.


T          F**      25.       Advertising is not regulated by the Code of Ethics.



1. Which of these best captures the main idea of Article 16?
The answer is B – Respect agency and other exclusive relationships other REALTORS® have with their clients.
b. Respect agency and other exclusive relationships other REALTORS® have with their clients.

2. When is a “general” mailing an ethical practice?
The answer is A – At any time¸ so long as MLS or other similar data is not used to target properties currently listed.
a. At any time¸ so long as MLS or other similar data is not used to target properties currently listed.

3. When can a REALTOR® “solicit” another broker’s exclusive listing?
The answer is C – If the owner initiates the contact and the REALTOR® has not directly or indirectly initiated the discussion¸ the REALTOR® can discuss the terms of a future listing.
c. If the owner initiates the contact and the REALTOR® has not directly or indirectly initiated the discussion¸ the REALTOR® can discuss the terms of a future listing.

4. When can a REALTOR® deal with the client of another REALTOR® who has an exclusive agreement with the client?
The answer is C – If the client initiates the dealings.
c. If the client initiates the dealings.

5. When must REALTORS® disclose their brokerage relationship?
The answer is D – All of the above.
d. All of the above.


Case study questions:
1. What Standard of Practice under Article 12 applies in this situation?

None. This is not an Article 12 problem.
Standard of Practice 12-6 (status as owner or REALTOR®).
Standard of Practice 12-5 (name of firms in ads).
Standard of Practice 12-1 (“free” products or services).
2. Is Jill and/or Sandy in violation of Article 12?

Yes… both are in violation because the name of the firm was not disclosed in the advertising.
Only Jill is in violation because it was her phone number.
Only Sandy is in violation because she is the broker and she had the listing.
Neither are in violation.
1. How can Article 12 best be summarized?
The answer is A – Be truthful in all communications¸ including advertising¸ marketing¸ and other representations.
a. Be truthful in all communications¸ including advertising¸ marketing¸ and other representations.

2. Who can claim to have “sold” property?
The answer is C – Anyone who participated in the transaction¸ whether as listing broker or cooperating broker.
c. Anyone who participated in the transaction¸ whether as listing broker or cooperating broker.

3. Can REALTORS® use the term “free” in their advertising?
The answer is B – Yes¸ as long as all terms governing the availability of the offered product are clearly disclosed at the same time.
b. Yes¸ as long as all terms governing the availability of the offered product are clearly disclosed at the same time.

4. The offering of premiums or inducements:
The answer is C – is not unethical as long as potential recipients have a clear understanding of all terms and conditions of the offer.
c. is not unethical as long as potential recipients have a clear understanding of all terms and conditions of the offer.

5. When advertising unlisted property in which a REALTOR® has an ownership interest:
The answer is B – the REALTOR® must disclose their interest as an owner or landlord¸ and as a REALTOR® or real estate licensee.
a. the REALTOR® must list the property with their firm.


1. Which of the following is the most accurate paraphrase of Article 9?
The answer is C – Get everything in writing.
c. Get everything in writing.

2. When must a REALTOR® give copies of an agreement to a party?
The answer is A – Upon their signing or initialing.
c. Within 24 hours of signing or initialing.

3. Once a contract for sale is executed by all parties, a REALTOR®:
The answer is C – must use reasonable care to ensure that the documents are kept current by written extensions and amendments.
c. must use reasonable care to ensure that the documents are kept current by written extensions and amendments.

4. Minor typographical errors, such as a transposed number in an address:
The answer is C – must be appropriately corrected¸ either by initialing or by using an amendment form¸ properly initialed or executed by all parties.
c. must be appropriately corrected¸ either by initialing or by using an amendment form¸ properly initialed or executed by all parties.

5. Which of the following documents are covered by Article 9?
The answer is D – all of the above.

1. The main idea of Article 2 is:
The answer is A – disclosure.
a. disclosure.

2. A REALTOR® has an obligation to:
The answer is B – avoid misrepresentation of pertinent facts about the property or the transaction.
b. avoid misrepresentation of pertinent facts about the property or the transaction.

3. Article 2 requires REALTORS® to:
The answer is C – discover and disclose adverse factors only within areas required by the real estate licensing authority.
c. discover and disclose adverse factors only within areas required by the real estate licensing authority.

4. “Pertinent facts” include:
The answer is B – physical defects in the property that the seller discussed with the listing broker.
b. physical defects in the property that the seller discussed with the listing broker.

5. Facts about surrounding properties:
The answer is B – should be disclosed if they affect the value or desirability of the property being sold.
b. should be disclosed if they affect the value or desirability of the property being sold.

Can a Realtor Be a Loan Officer?

When it comes to getting a mortgage, most people will go through a loan officer. This person is responsible for helping the borrower get the best deal possible on their mortgage. They work with banks and other lending institutions to find you the best rate, terms, and overall package. So, can a realtor also be a loan officer? The answer is yes. However, there are some qualifications and requirements that must be met in order to become a loan officer.

First and foremost, a loan officer must have a college degree. This is not always a requirement for realtors, but it is for loan officers. They must also have at least two years of mortgage-related experience. This could include working in a bank or lending institution or even being a realtor who has worked with mortgages extensively. Finally, loan officers must pass a licensing exam.

So, can a realtor be a loan officer? The answer is yes, but they must meet certain qualifications. Realtors who are looking to move into the mortgage industry should consider becoming a loan officer to expand their business opportunities. There are both pros and cons to having a realtor be a loan officer. On the one hand, they have the experience and knowledge necessary to help borrowers get the best mortgage possible. On the other hand, they may be seen as biased towards a certain lender or bank. As always, it is important to weigh both sides of the argument before making a decision.

What are the qualifications for being a loan officer?

When it comes to the qualifications for being a loan officer, it’s not as simple as having a college degree. There are a few key things you’ll need to have in order to be successful in this career field. First and foremost, loan officers need to have strong math skills. They also need to be able to effectively communicate with people, both orally and in writing. Being able to stay organized is also important, as loan officers often have a lot of paperwork to keep track of. Finally, it’s helpful to be familiar with computers and various software programs that are used in the lending industry. If you have all of these skills and qualities, then you may be a good fit for a career as a loan officer.

What are the pros and cons of having a realtor be a loan officer?

When it comes to having a realtor be a loan officer, there are pros and cons on both sides of the argument. On one hand, having a realtor as your loan officer can be beneficial because they know the market inside and out and can help you get the best rate possible. They also have experience dealing with buyers and sellers, so they can help you through the entire process. On the other hand, some people believe that having a realtor as your loan officer is a conflict of interest. Since they are being paid by the seller, they may not be as motivated to get you the best deal possible.

Can a Realtor Duble Dip on Two Transactions?

SO the question is if the real estate agent can be a realtor on a transaction and do the loan be a loan officer also?  Can a real estate collect two checks on a broker and real estate side? The answer is YES on conventional loans but NOT on government loans. There is no conflict of interest but certain government guidelines, a SAFE act which prohibit realtors and loan officers from making money twice on the same transaction. It doesn’t matter if he or she is an attorney and collects an attorney fee and a real estate commission or an insurance agent making money by selling a real estate and the insurance policy.

The cons of having a realtor as your loan officer

When it comes to getting a home loan, you have a lot of options to choose from. One of those options is whether or not to have a realtor as your loan officer. There are pros and cons to both choices, so it’s important to weigh them all before making a decision. In this blog post, we’ll take a closer look at the pros and cons of having a realtor as your loan officer.

1. You may not get the best interest rate. Realtors are paid by commission, so they may not be as motivated to get you the best interest rate possible. They may also have relationships with certain lenders that could give you a better rate than you would get on your own.

2. You may not get the best terms and conditions. Realtors are likely more focused on the sale of a property than on the details of a loan. They may not be as knowledgeable about the various terms and conditions that could be negotiated on your behalf.

3. You may not get the best customer service. A loan officer who is also a realtor may be too busy or too stretched to provide the best customer service. They may not have the time to answer all of your questions or to help you through the loan process.

When choosing a loan officer, it is important to weigh the pros and cons of having a realtor as your loan officer. In some cases, it may be the best decision for you, but in others, it may be wiser to go with a loan officer who is not also a realtor.


What is Okun’s Law?

Okun’s law is an economic theory thatstates that there is a close relationship between a nation’s unemployment rate and its GDP growth. The law is named after Arthur Okun, who first proposed it in 1962. Okun was an economist who served as an advisor to President John F. Kennedy, and was instrumental in developing the country’s economic policy during the early 1960s.

The theory behind Okun’s law is that when unemployment is high, there are more workers available to be hired, which drives down wages. This, in turn, makes it less expensive for businesses to produce goods and services, which leads to an increase in GDP. When unemployment is low, the opposite happens; workers are scarce, so wages go up, making it more expensive for businesses to produce goods and services, resulting in a decrease in GDP.

There is a great deal of debate among economists as to whether or not Okun’s law is actually a law, or simply a theory. Some argue that the relationship between unemployment and GDP growth is not as strong as Okun claimed it to be. Others argue that the law only holds true in certain situations, such as when the overall economy is growing.

Regardless of whether or not it is truly a law, Okun’s law is still an important concept to understand. It can help economists and policy makers predict how changes in unemployment will affect GDP growth, and vice versa. It can also help them devise policies that will encourage economic growth while keeping unemployment low.

How does Okun’s law work?

Okun’s law is an economics rule that states that for every 1% increase in a country’s unemployment rate, there is a corresponding 2% decrease in the country’s GDP.

There are a number of reasons why Okun’s law exists. One reason is that when people are unemployed, they have less money to spend on goods and services. This reduces demand, which in turn reduces production and leads to a decrease in GDP.

Another reason is that unemployed workers often have to take lower-paying jobs, which reduces the average wage in the country. This also reduces demand and leads to a decrease in GDP.

Finally, when people are unemployed, they tend to reduce their spending on things like housing, cars, and vacations. This also reduces demand and leads to a decrease in GDP.

Despite these factors, there are also reasons to be optimistic about Okun’s law. One reason is that when people have jobs, they are able to afford basic necessities like food and shelter, which helps keep the economy stable.

Another reason is that when the unemployment rate goes down, it often means that the economy is growing, and this leads to an increase in GDP.

In conclusion, while Okun’s law has its drawbacks, there are also a number of reasons to be optimistic about it. It’s important to keep in mind that the law is not set in stone, and can be affected by a variety of factors. However, overall, it is a good indicator of how the economy is doing.

When is Okun’s law Useful?

Okun’s law is a macroeconomic theory that states that there is a linear relationship between a country’s rate of economic growth and the rate of unemployment. The theory was developed by American economist Arthur Okun in 1962.

The theory is often used by policy makers to evaluate the effectiveness of economic policies. For example, if a country’s unemployment rate is high, policy makers may use Okun’s law to estimate the amount of economic growth that would be necessary to reduce the unemployment rate.

Okun’s law is not always accurate, and it has been critiqued by some economists. However, it remains a useful tool for policy makers and economists to consider when making decisions about the economy.


What Are Loan Fees In Residential Mortgage

When obtaining a loan, a borrower will incur a number of charges and costs. Many of these may be financed, such as paid out of loan proceeds which reduces the amount of cash in a refinance or applied to the purchase in a purchase loan. If paid for by the mortgage broker in exchange for a higher interest rate (YSP) they are financed. Others are paid up front or in cash at closing by the borrower.

A loan fee established as a percentage of the loan amount or principal balance may be referred to as “points.” One point is the same as one percent of the loan amount (not one percent of interest rate).

Fees that may be expressed as points include a loan origination fee, a mortgage broker’s fee, discount points and yield spread premiums, which are all percentages of the loan amount, or loan balance.

A loan origination fee covers the lender’s cost and profit for preparing documents and providing other services in processing the loan in-house.

The mortgage broker’s fee pays for a mortgage broker to originate the loan.

A prepayment penalty may be charged on a nongovernment-backed loan that is paid off early. It may be a percentage of the loan amount or be the amount of interest the lender would have earned for a specified period (e.g., interest for the following six months).

The par rate is the interest rate that would be charged without any yield spread premiums to increase it or discount points to decrease it.

Discount points are fees charged to a borrower for a loan at a reduced interest rate. As discussed earlier, one point of discount does not equal one point of interest.

Yield spread premiums (YSPs) are points credited for an interest rate above its par rate. “No closing cost” loans result from applying the YSP to pay the borrower’s closing costs so that they need not be paid up front. Some states prohibit the use of terms such as “No Cost” or similar claims in mortgage loan advertising as they are misleading and deceptive.

Rate sheets provide options that may be offered to borrowers in terms of interest rates and points charged. The more points paid by the borrower up front, the lower the interest rate charged over the duration of the loan. As the interest rate increases, fewer points will be paid. For a loan above the par rate, points may become a negative number on the rate sheet. Negative points mean the lender will credit the borrower with a YSP to reduce his closing costs.

For Example
Based on the rate sheet below for borrower-paid loan originator compensation, there are no points needed to obtain a loan at 6.25%. To buy his interest rate down, a borrower could pay 1 point and get a 0.25% interest rate reduction. To get extra cash at closing, equal to 1% of the loan amount, he could agree to pay 6.5%.


Interest Rate

















The formula for any loan fees that are expressed as points or percentages is:

Loan Amount x Percentage of Fees = Amount of Loan Fees

The phrases “3 points,” or “3 discount points,” and “3 percent loan fee” or “3 percent loan origination fee” all relate to a 3 percent fee. Loan Fees (or Points) = 0.03 x Loan Amount.

If the fee percentage needs to be calculated, this can be done by dividing the loan fees by the loan amount.

For Example
A borrower paid $300,000 for a home. He got an 80% loan, paying 1 point for a loan origination fee and 2 discount points.

  • The points amounted to 3% of the loan amount.
  • The loan was $240,000 (80% of the $300,000 price).
  • The points were $7,200 (3% of the $240,000 loan = 0.03 x 240,000).


What Are Prorations

Recurring expenses (e.g., property taxes, interest, insurance or homeowners’ association assessments) will generally be prorated at the time of closing. Prorating involves proportionately allocating an expense based upon the relative time for which a party is responsible for the expense. These costs must be included in the disclosures provided to the borrower prior to consummation of his loan. For example, if a sale closed three months into the tax year, proration would allocate the seller’s responsibility for the annual property tax to be one-quarter and the buyer’s responsibility to be three-quarters.

Proration is used to:

  • split the cost of monthly interest on an assumed loan, the cost of annual taxes or the cost of homeowners’ association fees between the buyer and seller.
  • determine how much the seller may be entitled to receive as a refund of a prepaid hazard insurance premium, if he cancels the policy before it expires.
  • determine how much of a full month’s interest a buyer or seller may owe a lender for use of its money for less than a full month.

Prorating may be performed using a 365-day year or a 360-day year:

  • In a 365-day-year prorate, the annual cost is divided by 365 to get the daily cost, and each month is considered to have the number of days it actually does have.
  • In a 360-day-year prorate, the annual cost is divided by 360 to get the daily cost, and each month is considered to have 30 days, regardless of the number of days it actually has.

In a leap year, 366 days would be substituted for 365.

Prepaid interest, or per diem interest, is the dollar amount cost of the interest that the buyer will be charged at closing for the use of the loan proceeds from the date the loan closes to the date the loan payment schedule begins, typically the first day of the following month.

In addition, the seller may have to pay interest on his existing loan at closing, since his last payment prior to closing covered the interest accrued in the month before the payment. Because interest is paid in arrears, a loan payment for April would include interest for the month of March. If the sale closed in April, the seller would owe interest for the use of the funds in April up to or through the closing date, either to the lender (if the loan were paid off) or to the buyer (if the buyer were to assume the loan).

The prorated interest amounts can be calculated using the following steps:

  1. Annual Interest = Loan Amount x Annual Percent Interest
  2. Daily Interest = Annual Interest ÷ Days in the Year (365 or 360)
  3. Prepaid Interest on New Loan = Daily Interest x Days from Closing to the Next Month (using the exact days in the month for a 365-day prorate, or 30 days for a 360-day prorate)
  4. Interest on Seller’s Existing Loan = Daily Interest x Days from Last Payment to Closing
For Example
For Example
A $100,000 loan with a 5.5% interest rate closes on August 17. This means the buyer will pay for interest that is charged starting on August 17. The loan payment schedule will “start” on September 1, with the first payment (covering the interest for September) due October 1.Using a 365-day year, the lender is owed interest for 15 days in August (31 days – 16 days after the release of funds on August 17).Annual Interest = $100,000 x 5.5% = $5,500
Daily Interest = $5,500 ÷ 365 = $15.07
Prepaid Interest = $15.07 x 15 = $226.05Using a 360-day year, the lender is owed interest for 14 days in August (30 days – 16 days prior to release of funds on August 17).Annual Interest = $100,000 x 5.5% = $5,500
Daily Interest = $5,500 ÷ 360 = $15.28
Prepaid Interest = $15.28 x 14 = $213.92


In some cases, when the loan closes very early in the month, the lender will start the loan term earlier and rebate the interest to the borrower. For example, if the loan above were to close on August 4 instead of August 17, the loan payment schedule would start on August 1; the first payment would be due on September, 1 rather than October 1; and the lender would credit four days of interest back to the borrower.

Mortgage Lock-ins

Any quoted interest rate is binding only if the loan were to be settled within the time period specified in the Loan Estimate provided by the loan originator, which may be one day or several days. If a borrower chooses to float the interest rate, the rate will not be set until closing, unless the borrower obtains a lock-in (also called a rate lock or rate commitment). This is a lender’s promise to hold a certain interest rate and a certain number of points for the borrower for a specified period of time while his loan application is processed. In order for the lock-in agreement to be enforced by the borrower, it must be in writing and be acknowledged by the lender. If the loan is not settled within the lock-in period, the locked-in rate and points may be lost.

Most lenders will not charge a lock-in fee to lock an interest rate or a number of points for a limited period, such as 10 days or 60 days, but they may charge a fee for a longer lock-in period. The fee is usually expressed as points (e.g., 1/4 point for a 90-day lock), but it might be a flat fee or even a fraction of a percent added to the locked-in rate. It may be charged at settlement or up front.

If a rate lock expires, the prevailing rate at the time becomes the new rate of the loan and the loan rate floats until a new rate lock is created. Among the factors affecting the fee is the length of the lock-in period (e.g., the longer the period, the greater the risk to the lender that interest rates will have risen) and the lock-in option selected.


Some of the lock-in options that might be available to a borrower include:

  • locked-in interest rate and locked-in points. This is a “true lock-in,” as it freezes the rate and points.
  • locked-in interest rate and floating points. This freezes the rate but allows points to fluctuate with market conditions. Therefore, if market interest rates drop, the points may drop; if rates rise, the points may increase. However, the points may be locked in at some time before settlement at the then-current level.
  • floating interest rate and floating points. Often called a “float-to-lock,” this freezes the interest rate and the points at some time after the application but before settlement.
  • float-down rate lock. This caps the interest rate and the number of points but allows the borrower to get the loan at a lower rate if rates float down.

Upon loan approval, the lender will provide a loan commitment promising to grant a loan at specific terms, including the loan amount, the length of time the commitment is valid, and any conditions for making the loan, such as receipt of a satisfactory title insurance policy protecting the lender. These conditions are called closing stipulations and may be pre- or post-closing. A loan will not be funded by the lender until all post-closing stipulations are met.

Mortgage Lock-ins

A borrower’s monthly mortgage payment will repay money borrowed plus interest. It may also include a reserve payment (also known as an escrow or impound payment) that represents approximately 1/12 of the estimated annual hazard and flood insurance premiums and property taxes. Some escrow accounts will include assessments of special improvements, homeowners’ association fees and other recurring charges.

The escrow account is required for:

  • all FHA and VA loans.
  • conforming conventional loans for greater than 80 percent of the appraised property value.
  • higher-priced mortgage loans secured by a first lien on the borrower’s principal dwelling.

When there is need of an account, the borrower may be required to make an initial deposit into the reserve account at settlement to ensure that the regular monthly deposits will accumulate enough to pay the property taxes, insurance premiums or other charges when they are due.

Tax Escrow and Insurance Reserves

A borrower’s monthly mortgage payment will repay money borrowed plus interest. It may also include a reserve payment (also known as an escrow or impound payment) that represents approximately 1/12 of the estimated annual hazard and flood insurance premiums and property taxes. Some escrow accounts will include assessments for special improvements, homeowners’ association fees and other recurring charges.

The escrow account is required for:

  • all FHA and VA loans.
  • conforming conventional loans for greater than 80 percent of the appraised property value.
  • higher-priced mortgage loans secured by a first lien on the borrower’s principal dwelling.

When there is need of an account, the borrower may be required to make an initial deposit into the reserve account at settlement to ensure that the regular monthly deposits will accumulate enough to pay the property taxes, insurance premiums or other charges when they are due.


The maximum amount a lender can collect for this deposit cannot exceed the sum of:

  • an amount sufficient to pay taxes, insurance premiums or other charges up to the due date of the new loan’s first full monthly mortgage installment payment; plus
  • an additional amount sufficient to pay future estimated taxes, insurance premiums and other charges, not in excess of two months’ worth, which is 1/6 of the estimated charges for the following 12 months.
For Example
The settlement date is May 31, the due date of the borrower’s first mortgage loan payment is July 1, and annual taxes are $2,160.

  • The monthly tax accrual: $2,160 ÷ 12 months = $180

The due date for taxes is November 15 for the tax year. The reserve amount represents the amount of taxes accruing between November 15 of last year and June 30.

  • The reserve amount: $180 x 8 months = $1,440

Additional reserve amounts can be required of up to two months’ advance payment.

  • Two months’ estimated charges: $180 x 2 months = $360

The maximum total reserve deposit for taxes at settlement is: $1,440 + $360 = $1,800

If the due date for taxes were April 30, the reserve amount would be due for only May and June.

  • The reserve amount: $180 x 2 months = $360
  • Two months’ estimated charges: $180 x 2 months = $360
  • Maximum total reserve deposit: $360 + $360 = $720, equal to four months of taxes


The same procedure is used to determine the maximum amounts that can be collected by the lender for insurance premiums or other charges.

Once monthly mortgage payments begin, the borrower cannot be required to pay more than 1/12 of the annual taxes and other charges each month, unless a larger payment is necessary to make up for a deficit in his account (caused by increased taxes or insurance premiums) or to maintain the two-month cushion, which is 1/6 of annual charges.

A clause in the mortgage or trust deed will generally require the borrower to maintain property insurance (i.e., hazard insurance) and provide that, if the policy lapses because of nonpayment of the premium, the lender can declare the buyer in default and force place the insurance (i.e., pay for the coverage and require that the borrower reimburse the lender in order to avoid foreclosure). A mortgagee clause in the insurance policy will include the lender as an additional loss payee so that, in the event of a covered loss, the lender will have some say over how the insurance claim proceeds are used (e.g., to repair the damage or, if the borrower and lender agree, to apply them to the balance of the debt instead of repairing the damage).


Fannie Mae requires that for any first-lien mortgage (excluding a reverse mortgage), the minimum hazard insurance coverage required is the lesser of:

  • 100 percent of the insurable value of the improvements, as established by the property insurer; or
  • the unpaid principal balance of the mortgage, as long as it equals the minimum amount (80 percent of the insurable value of the improvements) required to compensate for damage or loss on a replacement cost basis. If it does not, then the coverage that does provide the minimum required amount must be obtained.
For Example
A buyer obtains a $160,000 loan to purchase a property with a sales price of $200,000. The insurer determines the insurable value of the improvements is $150,000. Therefore, the purchaser need obtain only $150,000 of hazard insurance.The insurable value does not include the value of the land.


With regard to one- to four-family investment property in which the owner will not live, Fannie Mae and Freddie Mac require six months of principal, interest, and property taxes and insurance (PITI) in reserve. This reduces the lender’s risk in the event the owner experiences a period of vacancies.


Flood Insurance Legislation

Dwelling and homeowners insurance cover losses to improvements (not to land) caused by fire, windstorms and other natural causes. However, these policies do not cover a property owner against catastrophic losses from such causes as earthquakes and floods. To get such coverage, he can purchase earthquake coverage and/or flood insurance as endorsements or separate policies.

The National Flood Insurance Act of 1968 and the Flood Disaster Protection Act of 1973 prohibited any lender from making, increasing, extending or renewing a loan that will be benefited by any federal program (e.g., an FHA loan) and that is secured by improved real estate or a mobile home located in an area designated by the Federal Emergency Management Agency (FEMA) as a Special Flood Hazard Area (SFHA), unless the building or mobile home and any personal property securing the loan are covered by flood insurance:

  • for the entire loan term.
  • with a limit of at least the lesser of:
    • the outstanding principal loan balance; or
    • the maximum limit of coverage made available under the Flood Disaster Protection Act for the particular type of property. Coverage is limited to the overall value of the property less the value of the land.


Flood Zone Determination

In his appraisal, an appraiser will review a FEMA Flood Insurance Rate Map and show the FEMA flood zone designation, map panel number, map number and map date in the report. However, the final responsibility for determining whether a property is located in an SFHA rests with the originating lender. Therefore, the mortgagee will often obtain a flood zone certification, independent of any assessment made by the appraiser.

Flood insurance is required for property improvements located in an SFHA Zone A (an area subject to inundation by a 1%-annual-chance flood event) or a Zone V (an area along the coast subject to inundation by a 1%-annual-chance flood event with additional hazards associated with storm-induced waves).

Fannie Mae, Freddie Mac and Ginnie Mae are required to have procedures reasonably designed to ensure that required flood insurance is in place throughout the term of any mortgage loan they purchase or guarantee. Therefore, they require lenders and servicers to monitor, on an ongoing basis, the flood zone status of any loans sold to or serviced for them. In order to comply with these requirements, mortgage lenders must obtain an initial flood zone determination before originating a mortgage loan and take steps to monitor the flood zone status of any improvements securing the loan throughout the loan term.


A borrower may be charged:

  • a fee for flood zone determinations and life-of-the-loan tracking, not to exceed the actual charge of any third party used to make the determination.
  • an initial insurance premium at closing and an ongoing annual premium for any required flood insurance. If an escrow account is required for taxes and hazard insurance premiums, escrow must also be used for required flood insurance premiums.

If, at any time during the life of a loan, the lender determines that the property is in an SFHA and is not covered by flood insurance, it will instruct the borrower to obtain flood insurance. If the borrower does not promptly purchase the required insurance, the lender will force place (i.e., purchase) the insurance on the borrower’s behalf.

The Biggert-Waters Flood Insurance Reform Act of 2012 contains many reforms and changes, including clarifying that private flood insurance may satisfy flood insurance requirements if it meets certain standards. Fannie Mae, Freddie Mac and Ginnie Mae are required to accept flood insurance from private providers as an alternative to National Flood Insurance Program (NFIP) policies. The Act also amended RESPA to require an explanation of flood insurance and the availability under the NFIP or from a private insurance company.


Refinancing Considerations

Reasons a person might consider refinancing a home mortgage include:

  • lowering monthly payments.
  • withdrawing equity (cash-out mortgage refinance) to repay the previous mortgage and meet other financial expenses.
  • converting an adjustable-rate mortgage to a fixed-rate mortgage.
  • stopping the payment of private mortgage insurance.

Just as financing a new loan has a cost, so does refinancing. These costs may include, but are not limited to:

  • application, loan origination and appraisal fees.
  • escrow and title insurance costs.
  • per-diem interest.
  • tax and insurance reserves.
  • prepayment penalties on the existing loan.

Lenders have the responsibility to prove there is tangible net benefit to the borrower before proceeding with a refinance application. For example, a lender cannot charge $10,000 in fees just to get a one-quarter point reduction to the borrower’s interest rate. The benefit to the borrower would not justify the monetary cost.

A tangible net benefit to the borrower may be:

  • refinancing an adjustable-rate mortgage to a fixed-rate mortgage.
  • depending on the type of ARM being refinanced:
    • a reduction of at least five percent in the principal and interest payment; or
    • a new interest rate that is at least two percentage points below the current rate.


Prepayment Penalties

Loans may be made with or without a prepayment penalty provision. The presence of a prepayment penalty can affect the interest rate the lender will offer and create an additional cost when refinancing the loan.

A prepayment penalty is a charge imposed by the lender if the borrower repays the loan within a specified period of time, generally within five or fewer years from the date of consummation of the loan. A loan with a prepayment penalty will generally have a lower interest rate than one without, because it discourages the borrower from refinancing immediately if market interest rates drop.

All prepayment penalties will apply to repayment due to refinancing, because refinancing would occur when the borrower could obtain lower rates elsewhere and the lender would probably not be able to loan the money out again at the rate being charged the borrower. A penalty that applies only to refinancing is called a soft prepay penalty; one that applies to any prepayment, including from the sale of the property, is called a hard prepay penalty.


A penalty is most often expressed as a percentage of the outstanding loan balance at the time of prepayment or as a specified number of months of interest.

For Example

A $100,000 loan at 6% interest has a 2% penalty for prepayment within two years. If, at the time of prepayment, the loan balance were $98,750, the penalty would be 2% of $98,750.

A $100,000 loan at 6.5% interest has a penalty equal to six months’ interest if the loan were repaid within three years. If, at the time of prepayment, the loan balance were $98,750, the penalty would be 3.25% of $98,750.

A prepayment penalty may also be imposed for partial prepayments above a certain percentage of the loan balance within a certain period of time. Typically, a borrower may not prepay more than 20 percent of the loan balance in a single calendar year without penalty.


Refinancing Cost Recapture

A borrower intending to keep the refinanced loan for a number of years typically saves money by paying his loan costs up front, because his interest rate or loan amount will be lower and he will pay the lower rate year after year. Of course, if he does not keep the loan for the anticipated period, his costs may be more than if he had financed them in the new loan. For example, if he saves $40 a month in mortgage payments, his savings is $480 per year. If he paid loan and closing costs totaling $2,000, it would take more than four years to recapture his refinancing costs ($2,000 ÷ 480 = 4.16 years, or 4 years and 2 months).

Refinancing makes sense when a no-cost mortgage (no out-of-pocket costs) includes points and closing costs:

  • in the new interest rate, which is lower than his current rate; or
  • in the new loan amount, when the new monthly payment is still lower with the same or shorter loan term.

However, the borrower’s interest rate or mortgage payments will be higher than if he had paid his costs up front.




Types Of Mortgage Loans and Home Loans Explained 2022

Conforming and Nonconforming Loans

There is many types of mortgage loans. Conventional loans are loans made by private parties and nongovernment lending institutions without any government insurance or government guarantee against loss for the lender. Mortgage loans that are not FHA, VA or USDA (or Rural Housing Service) loans are conventional loans. They may be conforming or nonconforming.

Conventional loans that conform to the eligibility guidelines for purchase by Fannie Mae or Freddie Mac are considered conforming loans. Fannie Mae and Freddie Mac have a maximum loan limit for loans they will purchase, which is adjusted annually.

Loans to persons with satisfactory credit but that exceed this loan limit are called jumbo loans or non-conforming loans. Because these loans cannot be sold to Fannie Mae or Freddie Mac, they often have a higher interest rate than conforming loans.

Insured Loans

Conventional loans can be insured or uninsured. Generally, a conventional loan of up to 80 percent of the property’s value will be made without private mortgage insurance. Some lenders will charge higher interest rates to compensate for the increased risk inherent in making a loan that is more than 80 percent of the value; however, most require that the loan be insured by a private mortgage insurance company.

Private mortgage insurance (PMI) is an insurance policy issued to provide protection to the mortgage lender in the event of financial loss due to a borrower’s default that results in foreclosure. In the event of a foreclosure, the insurance company will either purchase the loan or let the lender foreclose and pay the lender for losses up to the face amount of the policy.

So that he may get a loan with a small down payment, the borrower pays a mortgage insurance premium either as a lump sum at closing covering the life of the loan, or by paying the first year’s premium at closing and then paying annual premiums as part of his mortgage payment. The amount of the premium is a percentage of the loan amount based on the borrower’s down payment. The annual premiums and the insurance stop automatically once the loan is paid down to 78 percent, or may be canceled at the borrower’s request once the loan balance reaches 80 percent of the value of the property at the time the loan was made.

Subprime Loans – one of Types Of Mortgage Loans

Until 2008, credit-impaired borrowers and other borrowers unable to obtain credit in the prime market were able to easily obtain financing from lenders specializing in subprime loans. Loans made to borrowers meeting Fannie Mae and Freddie Mac credit requirements are called A-paper loans. A-paper loans are conforming loans. Loans not meeting these requirements were called “Alt-A,” “B,” “C” and “D” paper loans, or subprime loans. Alt-A loans were treated as “A-” (A-minus) loans, in some cases because of less-than-prime credit, in other cases because of a lack of supporting documentation.

Factors causing a borrower to seek a loan from a subprime lender include:

  • a weak past credit performance.
  • a high monthly debt payment relative to income.
  • a lack of assets other than current income to support loan payments.
  • self-employment, variable income, or a desire to limit disclosure of his financial situation.

Under the risk-based pricing model used for subprime loans, up-front fees and interest rates were based on the degree of risk posed by the subprime borrower: the higher the risk, the higher a borrower’s rate and costs.

However, due to laxity and abuses in the origination and securitization of subprime loans, the actual loss far exceeded the estimated risk, resulting in bankruptcy and foreclosure for many borrowers and upheaval in primary and secondary markets, as well as real estate markets across the country.


Government-Related Loans

Many real estate mortgage loans are insured or guaranteed by the federal government through such programs as:

  • FHA-insured loans.
  • VA-guaranteed loans.
  • USDA-guaranteed loans.

These programs are one of the types of mortgage loans that have more liberal qualification criteria in terms of qualifying ratios and credit standards and higher loan-to-value ratios (LTVs). They also have requirements for some loan terms, including a limit of 4 percent as a late charge on a payment 15 days late and loan assumability.

Federal Housing Administration (FHA) Loans


The FHA is a division of HUD. FHA loans are loans that meet FHA program criteria and are made by approved lenders. For these loans, the FHA insures the issuing lender against loss in the event of default. Under the FHA program the lender can charge whatever points and interest a borrower is willing to pay, as the cost of the loan is negotiable. The advantage to the borrower is that the lender will make the loan with a very high LTV because it is insured.

However, FHA loan limits restrict the size of mortgages that can be insured by the Federal Housing Administration. The floor for a low-cost area is 65 percent of the national conforming loan limit. This is currently $417,000 for a one-unit property. For areas that have been designated high-cost areas, the ceiling loan limit is 150 percent of $417,000, as prescribed by the National Housing Act and the Economic Stimulus Act of 2008. The following table itemizes the floor/ceiling limits through December 31, 2016. (Single Family Housing Policy Handbook 4000.1)

Property Size

LowCost Area Floor

HighCost Area Ceiling

One Unit



Two Units



Three Units



Four Units



The states and territories of Alaska, Guam, Hawaii and the U.S. Virgin Islands are special exception areas allowing loan limits to be adjusted up to 150 percent of the national ceiling.

Federal Housing Administration (FHA) Loans


The FHA funds the insurance from a mortgage insurance premium (MIP) charged to the borrower. Most FHA mortgages require payment of an up-front mortgage insurance premium (UFMIP). The UFMIP is nonrefundable (except to the extent that a portion may be applied to the UFMIP of another FHA-insured mortgage within three years).

In addition, most FHA loans require payment of an annual mortgage insurance premium, payable monthly as part of the mortgage payment. This premium is based on the loan program, the loan term and the LTV.

For loans with FHA case numbers assigned on or after June 3, 2013, the FHA collects the annual MIP for the maximum duration permitted under statute.

  • For all mortgages, regardless of their amortization terms, involving an original principal obligation (excluding financed UFMIP) less than or equal to 90 percent LTV, the annual MIP will be assessed until the end of the mortgage term or for the first 11 years of the mortgage term, whichever occurs first.
  • For any mortgage involving an original principal obligation (excluding financed UFMIP) with an LTV greater than 90 percent, the FHA will assess the annual MIP until the end of the mortgage term or for the first 30 years of the term, whichever occurs first. (12 USC §1709(c)(2)(B), Single Family Housing Policy Handbook 4000.1)
The FHA calculates LTV as a percentage by dividing the loan amount (prior to the financing of any UFMIP) by the lesser of the purchase price (if applicable) or the appraised value of the home. For streamline refinances without appraisals, the FHA uses the original appraised value of the property to calculate the LTV.

Federal Housing Administration (FHA) Loans

The table below shows the previous and the new duration of annual MIP by amortization term and LTV ratio at origination. (Single Family Housing Policy Handbook 4000.1)






≤ 15 yrs ≤ 78% No annual MIP

11 years

≤ 15 yrs 78.01% – 90% Canceled at 78% LTV

11 years

≤ 15 yrs > 90% Canceled at 78% LTV

Loan term

> 15 yrs ≤ 78% 5 years

11 years

> 15 yrs 78.01% – 90% Canceled at 78% LTV & 5 yrs

11 years

> 15 yrs > 90% Canceled at 78% LTV & 5 yrs

Loan term

Under Public Law 111-229(1)(b), the FHA may adjust its mortgage insurance premium rates, as measured in basis points (bps).

This first table shows the previous and the new annual MIP rates by amortization term, base loan amount and LTV ratio. All MIPs in this table are effective for case numbers assigned on or after January 26, 2015.


Term > 15 Years

Base Loan Amt.


Previous MIP


≤ $625,500

≤ 95%

130 bps

80 bps

≤ $625,500

> 95%

135 bps

85 bps

> $625,500

≤ 95%

150 bps

100 bps

> $625,500

> 95%

155 bps

105 bps

This second table shows the effective annual MIP rates for loans with terms of up to 15 years. The new annual MIP for these loans is effective for case numbers assigned on or after January 26, 2015.


Term ≤ 15 Years

Base Loan Amt.


Previous MIP


≤ $625,500

≤ 90%

45 bps

45 bps

≤ $625,500

> 90%

70 bps

70 bps

> $625,500

≤ 78%

45 bps

45 bps

> $625,500

78.01 – 90%

70 bps

70 bps

> $625,500

> 90%

95 bps

95 bps

The increases in the annual MIP specified in the Single Family Housing Policy Handbook 4000.1 apply to all mortgages insured under the FHA’s single-family mortgage insurance programs except:

  • streamline refinance transactions of existing FHA loans that were endorsed on or before May 31, 2009.
  • Section 247 (Hawaiian Homelands).


203(b) Program

The most popular of the FHA loan programs is the 203(b) program. This program helps finance the purchase of a one- to four-unit family home that the borrower intends to occupy as his residence (i.e., move in within 60 days after closing and stay in the property for 12 months), using a 15- or 30-year loan and a cash investment of as little as 3.5 percent of the lesser of the property value or the purchase price. An applicant with a credit score of at least 580 can qualify for the 3.5 percent rate. One with a score of 500-579 can qualify with a cash investment of 10 percent. One with a score below 500 is not eligible for the loan.

Some or all of the cash investment can come from a gift from:

  • an immediate relative.
  • a labor union or employer.
  • a government agency or public entity.
  • a nonprofit charitable organization.

The gift donor, and the source of the gift donor’s funds, may not be a person or entity with an interest in the sale of the property (e.g., the seller, the real estate agent or broker, the builder, or an associated entity). A gift from any of these sources would be considered an inducement to purchase and would have to be deducted from the sales price. Therefore, a seller could not give the buyer a gift directly or channel funds through a nonprofit charitable organization to assist the buyer in acquiring the funds for his down payment.
The FHA allows the seller to contribute up to 6 percent of the purchase price toward the buyer’s actual closing costs, prepaid taxes and insurance, discount points, buydown fees, mortgage insurance premiums, and other financing concessions, but nothing toward the down payment.

Home Equity Conversion Mortgages (HECMs) The FHA’s Home Equity Conversion Mortgage (HECM) is a loan that enables an individual age 62 or older to:

  1. convert some of the equity in his primary residence to cash to pay living expenses; or
  2. purchase a primary residence, if he has the cash to pay the down payment and closing costs.

The borrower may take the loan funds in monthly advances for a fixed period or until he no longer qualifies and/or through a line of credit. Each month’s interest is added to the principal loan balance, causing the interest to be compounded.

The key points regarding HECM loans include the following:

  • The borrower must be 62 years of age or older, have significant equity in the property, occupy the property as his principal residence, and participate in a consumer information session given by an approved HECM counselor.
  • The loan amount is based on the age of the youngest borrower, the current interest rate, and the lesser of appraised value or the HECM FHA mortgage limit. The loan amount may include closing costs.
  • The borrower can select a fixed interest rate or an adjustable rate and choose whether the rate will adjust monthly or annually.
  • The loan has no specified term, prepayment penalties, or credit or income qualifications, as it requires no repayment until either the property is sold or the owner:
    • dies;
    • permanently moves;
    • fails to live in the house for 12 consecutive months; or
    • fails to pay property taxes, maintain hazard and/or flood insurance coverage, or maintain the property (i.e., perform necessary repairs).

Unlike other FHA mortgage programs, the HECM has:

  • a UFMIP of 0.5 percent or 2.5 percent, depending on the disbursements;
  • an annual MIP of 1.25 percent; and
  • a loan origination fee limit of:
    • the greater of $2,500 or 2 percent of the first $200,000; and
    • 1 percent of the amount over $200,000 of value.

    HECM origination fees are capped at $6,000.

    The FHA used to provide a second option, known as the HECM Saver, but the two programs were consolidated in 2013.

HECM Counseling (HUD Mortgagee Letter 2010-37; 2011-26; 2011-31)
All owners shown on the property deed (or legal representative in cases involving documented lack of competency) and a nonborrowing spouse must personally receive HECM counseling prior to entering an HECM contract. The counseling certificate must be signed and dated by:

  • the counselor;
  • all owners shown on the property deed (or legal representative in cases involving documented lack of competency); and
  • the nonborrowing spouse.

Lenders are required to provide each client with a list of HECM counseling agencies that includes no fewer than nine HUD-approved counseling agencies, including:

  • five agencies within the local area and/or state of the prospective borrower;
  • one agency within reasonable driving distance for the purpose of face-to-face counseling; and
  • national intermediaries awarded HECM counseling grant funds by HUD.

Fees and Loan Limits

The FHA allows most loan and closing fees, including discount points and yield spread premiums. However, it does prohibit the borrower from being charged a tax service fee, and it limits:

  • the loan origination fee on its HECM and Section 203(k) rehabilitation loans.
  • appraisal and credit report charges to their actual cost.
  • other closing costs to what would be customary and reasonable.

The maximum insurable mortgage amount is the lesser of:

  • a statutory loan limit for the area (based on housing costs), typically a county or metropolitan statistical area (MSA); or
  • the applicable LTV limit.

Neither limit includes the UFMIP, even if it is added to the base loan amount.

Income and Credit Qualifications

FHA loans are not restricted to first-time homebuyers or those with low or moderate income. Anyone who can meet the FHA’s liberal underwriting criteria can obtain such a loan. The borrower’s income and employment must be verified, and his credit history will be analyzed (e.g., a court-ordered judgment must be paid off or be in the process of being paid off under an agreement with the creditor for regular and timely payments). The FHA also accepts nontraditional mortgage credit reports on borrowers lacking the types of trade references that normally appear on traditional credit reports, provided the information is verified and documented. These may be a substitute or a supplement to a traditional credit report. Such reports include credit references relating to rental housing payments, utility payments and other bill payments (e.g., insurance, child care, phone, auto leases, etc.)

A borrower can qualify for an FHA loan with monthly payments for principal, interest, and property taxes and insurance (PITI) of up to 31 percent of his gross monthly income; and total monthly debt of up to 43 percent of his gross monthly income. In addition, sources of regular income not subject to federal taxes (e.g., certain types of disability and public assistance payments, Social Security income, and military allowances) and child support income can be grossed up by 25 percent in calculating the borrower’s income for qualifying purposes. This means the amount of continuing tax savings attributable to that source may be added to the borrower’s gross income. When a borrower does not have to file a federal income tax return, the tax rate used is 25 percent. On the other hand, the FHA requires that gross rental income be reduced by either 25 percent or a percentage developed by HUD’s jurisdictional Homeownership Center (HOC) for vacancies and maintenance.


Before agreeing to insure a loan, the FHA can require repairs necessary to preserve the continued marketability of the subject property and protect the health and safety of the occupants. If the home requires flood insurance and is not located in an area where the National Flood Insurance Program is in force, it is not eligible for FHA financing.

The FHA requires that a “For Your Protection: Get a Home Inspection” notice be given to a prospective homebuyer at first contact (whether for prequalification, preapproval or initial application), but never later than at the time of the initial application. The notice informs the buyer of the importance of a home inspection prior to purchasing a home. It also makes clear that:

  1. the FHA does not insure the condition of the property.
  2. the appraisal is intended only to assist the lender.

The FHA also requires the use of an amendatory clause in most transactions. This provides that the buyer is not obligated to conclude the transaction and is entitled to a full refund of his earnest money deposit if the property is appraised at less than the purchase price.


Most FHA loans are assumable, subject to the person assuming the loan qualifying. However, a loan insured after 1989 can only be assumed by an owner-occupant. A lender cannot approve the sale or other transfer of a property to a person (e.g., an investor) who will not be using the property as a primary residence or a secondary residence.

VA loans are made by approved lenders and guaranteed by the U.S. Department of Veterans Affairs. The guarantee is similar to mortgage insurance in that it limits the lender’s exposure to loss in the event of a borrower’s default that results in foreclosure. However, the veteran borrower is charged a nonrefundable up-front funding fee that can be financed, instead of a mortgage insurance premium for the guarantee. A veteran receiving VA compensation for a service-connected disability is exempt from the fee requirement.

The fee varies based on whether the borrower:

is a first-time VA borrower or a repeat borrower;
is eligible because of service in the regular military, or because of service in the Reserves or National Guard; and
puts nothing down, or puts at least 5 percent down.
The fee for a first-time VA borrower who is a veteran of the regular military is 2.15 percent of the loan amount. It is higher if he qualifies as a Reservist or has obtained a VA loan previously. It is lower if he makes a down payment of at least 5 percent. As with the FHA premium, this fee can be financed in the loan.

Advantages of VA Loans

VA loans are types of mortgage loans that primary advantage of a VA loan is that there is no down payment required on a loan of up to Freddie Mac’s conforming loan limit. In addition, the seller can pay:

  • all of the borrower’s nonrecurring closing costs and discount points, with no limit.
  • up to 4 percent of the sales price in seller concessions (i.e., anything of value added to the transaction for which the borrower pays no additional amount and that the seller is not customarily expected to pay). Concessions include prepaid taxes and insurance, the VA funding fee, payoff of the borrower’s existing debts, temporary buydown fees, and gifts.
    Additionally, it is easier to qualify for a VA loan than for a conventional loan. The VA uses two methods for qualifying its borrowers:


  • A 41 percent debt-to-income ratio (including housing and fixed debt)
  • The residual income method, which determines whether the veteran has enough income after paying his fixed debts to cover his daily living expenses and which can qualify a borrower whose ratio might exceed the 41 percent limit
    However, the interest rate is not lower than that for other loans, the seller is generally not required to make repairs, and finance charges are not significantly lower.



A VA loan is available only to veterans of the armed services, certain active and discharged military personnel, and their spouses; however, the loan is assumable by nonveterans. In order to obtain the loan, the applicant must obtain a Certificate of Eligibility from the VA (directly online, through the lender online, or by mail). This will determine whether he is eligible for a VA loan and whether he is eligible for a loan with the full guarantee.

The maximum loan guarantee varies depending on the location of the property. While the VA does not have a maximum loan amount, it will guarantee to the lender the lesser of 25 percent of the loan balance or 25 percent of the Freddie Mac limit. For high-cost counties, the guarantee is the lesser of 25 percent of the loan balance or 25 percent of the VA county loan limit, which takes into consideration the county’s median home price and the Freddie Mac conforming loan limit. The guarantee enables the lender to avoid losing money if he can recoup 75 percent of the loan balance from a sale of the borrower’s property at or after foreclosure.

For Example
If the Freddie Mac limit is $417,000, a veteran with full eligibility can get a loan of up to $417,000 without a down payment. The VA will guarantee the lender $104,250 (25 percent) against his loss in the event of default. If the borrower wanted to buy a home for $450,000, the VA would still only guarantee up to $104,250 of the loan. The borrower would need a 25 percent down payment on the balance of the price above $417,000.

If the borrower wanted to buy a $200,000 home, the lender would be guaranteed $50,000 against loss by the VA.

U.S. Department of Veterans Affairs (VA) Loans

An applicant who has used all or part of his entitlement for a VA loan can get it back to purchase another home if any of the following applies:

  1. The prior property has been sold and the VA loan has been paid in full.
  2. A qualified veteran buyer has agreed to assume the outstanding balance on the VA loan and substitute his entitlement for the same amount of entitlement the applicant originally used to get the loan.
  3. One time only, the applicant has repaid the prior VA loan in full without disposing of the property securing that loan.
  4. Even if an existing VA loan has not been paid off, the applicant has “remaining entitlement” due to an increase in the maximum entitlement amount since he obtained that loan.
  5. The borrower must also sign a Certificate of Occupancy, certifying that he will use the property as his primary residence. As with an FHA loan, for a VA loan, the applicant must intend to move in within 60 days after closing and stay in the property for 12 months.

A veteran cannot borrow more than the value shown on the VA appraisal, called a Certificate of Reasonable Value (CRV). He can, however, buy the property for a higher purchase price if he pays the difference in cash. If he does not wish to do so, he can terminate the transaction and receive a refund of his earnest money, utilizing an escape clause required in the VA sales agreement.
The VA does not warrant the condition of the property and is not concerned with cosmetic items, such as chipped paint. However, if the property was constructed before 1978, any area with chipping or peeling paint must be stabilized (i.e., scraped and painted to remove the lead-based paint hazard) and a lead paint notification and disclosure must be provided to the buyer.

The Rural Housing Service (RHS), within the USDA, makes financing available in rural areas through its Section 502 guaranteed loan program.

The loan funds can be used to build, repair, rehabilitate, renovate or relocate a primary residence or to purchase and prepare a site for one, including providing water and sewage facilities. The housing must be modest in size, design and cost and also meet the voluntary national model building code adopted by the state and the Housing and Community Facilities Program’s (HCFP) thermal and site standards.

This program is similar to that offered by the federal VA in that both involve loans with a 30-year term, a fixed interest rate set by the lender, no required down payment and an up-front 2 percent guarantee fee (which may be financed). However, the USDA guarantee applies to 90 percent of the loan. Lenders for this program include state housing agencies and lenders approved for participation in FHA, VA, Fannie Mae or Freddie Mac loan programs.

Loan applicants must:

  • be without adequate housing.
  • have less than 20 percent liquid assets (not including retirement accounts).
  • have a steady income of up to 115 percent of the median income for the area;
  • have a reasonable credit history; and
  • be able to afford the mortgage payments, including taxes and insurance.

The lender must determine repayment feasibility, using 29 percent housing-to-income and 41 percent debt-to-income ratios.
For low-income creditworthy households unable to obtain credit elsewhere, the USDA is authorized to make loans through Section 502.

Fixed-Rate Mortgage (FRM)

Names (or terms) are often applied to mortgages and trust deeds to describe a certain feature of the loan, such as its purpose, the type of interest charged, the security used for the loan, etc. The mortgage or trust deed itself would not show the term, but a feature of that document would cause people to use the term to describe it. In most instances, in fact, one document could be described using any number of terms.

With a level-payment fixed-rate mortgage (FRM), both the interest rate and the monthly principal and interest payments stay the same for the entire loan term. The fixed interest rate will not change, regardless of future changes in the money supply, rate of inflation or anything else. The only possible change in monthly payments on the loan will result from changes in the cost of property taxes and insurance, if those are included in the monthly payment. The lender will change the payment amount after performing its annual escrow analysis.

In the case of a balloon/reset loan (or two-step loan), the interest rate and payments remain fixed for a specified term. At the end of that term, the borrower has the choice of repaying the loan or resetting the interest rate to the current interest rate and having a new fixed rate and payment amount for the remainder of the loan term.

For Example
For a 7/23 loan, the borrower’s payments are based on a 30-year term, but he has to pay off the loan in seven years or have the rate reset to a new fixed rate, which will require a new payment amount for the remaining 23 years. Even though this type of loan has two rates, it is considered a fixed-rate loan.

Fixed-Rate Mortgage (FRM)

Particularly during periods when the interest rates are relatively low, borrowers will select the fixed-rate loan over a variable-rate loan. Those last one are more popular types of mortgage loans. The drawbacks of this type of loan, however, are that:

  • the rate is usually higher than the initial variable rate being offered at the same time.
  • if interest rates were to decrease during the term of the loan, the borrower would have to refinance the loan (i.e., obtain a new loan to pay off all or part of the existing loan) and incur new loan costs in order to take advantage of the lower rates. As a result, during periods of high interest rates more borrowers will lean toward adjustable-rate mortgages (ARMs).
    A fixed-rate loan has no index rate or adjustment period; those are features of an ARM.


Adjustable-Rate Mortgage (ARM)

The initial (start) interest rate for an ARM is lower than that for fixed-rate mortgages for those  types of mortgage loans. The initial rate and payment amount will remain in effect for a limited time. After the initial period, the ARM interest rate will be based on an index rate, which increases or decreases periodically during the term of the loan according to an index specified in the loan agreement, plus a fixed margin amount. An ARM is subject to any limits, or caps, on changes in the rate or payment amount.

Amortized Loans

Amortization is the process of paying off a loan by gradually reducing the balance through a series of installment payments.

Fully Amortizing Loan

A fully amortizing (or self-liquidating) mortgage provides for periodic payments that repay the loan in its entirety by the end of the mortgage term. The most common methods of payment used for these loans are:

  • the level payment mortgage, which provides for equal payments of principal and interest throughout the loan period. As the principal balance is paid down, the portion of each payment that applies to the principal increases while the portion applying to interest goes down. However, the total monthly payment remains the same.
  • the budget mortgage, which provides for monthly mortgage payments to include an amount equal to 1/12 of the estimated annual property taxes and property insurance premiums, homeowners’ association dues and/or special assessments.

Partially Amortizing Loan

A partially amortized (balloon) mortgage provides for some, but not total, amortization during the mortgage term. It has payments that are equal and regular in nature. However, the loan term is shorter than the time needed to repay the full loan balance by making those payments. Therefore, at the end of the loan term, a large balloon payment is needed to pay off the remaining balance.

For Example
A $20,000 loan is made with an interest rate of 9 percent per year. Payments are based on amortization schedule of 30 years, but the loan has a term of only five years. The 30-year amortization schedule keeps the payments affordable at $162.92 per month. However, after five years, the borrower would have to pay off the entire outstanding principal balance of about $19,176 in one lump-sum balloon payment. This could be described as a 360/60 loan, indicating payments based on 360 months of amortization with a term of only 60 months. It could also be described as a 30/5 loan, indicating a term of five years with 30-year amortization.

Negative Amortization

If periodic installment payments on a loan are insufficient to pay all of the interest due, the unpaid interest is added to the principal, causing the loan balance to increase rather than decrease. This is called negative amortization.

Negative amortization may occur when the loan is:

  • a graduated-payment mortgage (GPM). In a GPM, payments start at a level that does not pay all of the interest being charged, so the unpaid interest is added to the loan balance, causing negative amortization. The payments gradually increase in scheduled amounts at scheduled times until they finally level out at the amount needed to amortize the loan over the remainder of the loan term.
  • an ARM with a payment cap. This loan allows a borrower to make payments that do not cover all of the interest being charged, while the lender adds unpaid interest to the outstanding loan balance.
  • an option ARM, or payment-option ARM, which gives the borrower options to make payments to amortize the loan over 15 years or 30 years, to pay interest-only for a period, or to make minimum payments. Payments under the minimum payment option (negative amortization, deferred interest) will not pay all the interest being charged, so the unpaid interest is added to the loan balance. (This type of loan is no longer generally available.)
  • a reverse mortgage, or reverse annuity mortgage. This loan has a balance that increases as loan proceeds are disbursed to the borrower and as interest is added to the balance.

Interest-Only Loans

An interest-only mortgage, also called a term or a straight mortgage, provides for no amortization during the term of the loan. The principal is repaid at the end of the loan term through a balloon payment. Some interest-only loans are really combination loans, as they have an initial period during which payments are interest-only followed by a period of substantially higher payments amortizing the loan for the remainder of the loan term.

Construction Loans

Construction financing is one of the  types of mortgage loans and is high-interest interim (or temporary) financing that serves to finance the cost of labor and materials used during construction. It extends from the start to the completion of the work, when it is then paid off, often with the proceeds of a more permanent form of financing (a take-out loan).

At the time a construction mortgage is created, the building that is pledged as part of the collateral for the loan does not exist, so only the land value is available as collateral. Generally, the lender wants the loan to be a first mortgage on the property. This means that either the land must be free of liens or the existing liens must be subordinated to the construction loan.

The loan is generally an open-end mortgage or a line of credit, in which the lender commits to lending (or authorizes) a certain amount, usually around 75 percent of the expected value of the property after the work has been completed. However, the lender does not initially release the full loan amount. Instead, it provides advances, or draws, as work is completed. If the mortgage provides for obligatory future advances (i.e., advances that must be provided if certain conditions are met by the borrower), those advances have priority over intervening liens.

The lender may withhold the final release of funds until the building inspector issues a certificate of completion and:

  • the lien period has expired, to ensure no liens are filed against the property for unpaid work; or
  • all labor and materials have been paid for, as evidenced by lien waivers from each of the contractors and subcontractors on the job.

Interest is charged on the money only as it is disbursed. It is generally repaid in interest-only installments during the loan period, although some lenders will allow interest to be repaid in a lump sum after the work is complete. In either case, the entire loan amount is due in full within a short period after completion of the work.
Permanent construction loans or construction-to-permanent loans which are  types of mortgage loans for investors may be made to owner-occupants and developers. Fannie Mae’s construction-to-permanent mortgage is a 15- or 30-year loan that can be used to finance construction of one- or two-unit owner-occupied homes, one-unit second homes, or investor homes. The loan amount may be up to 95 percent of the construction cost or the value of the property upon completion of construction, and the funds may be used to purchase the land for the home.

Postponement of Foreclosure Proceedings

Fannie Mae and Freddie Mac (Streamlined and Standardized) Short Sale

  • While the property is on the market and while the transaction is being negotiated, the foreclosure process may move forward.
  • The servicer will determine if the foreclosure process should be suspended based upon how much time prior to the foreclosure sale date the package is received. The listing agent or the borrower’s/seller’s attorney should verify whether the foreclosure sale is being postponed.
  • Once the short sale has been approved, the servicer must suspend the foreclosure sale to allow the short sale to close.

Non-GSE Traditional Short Sale

The foreclosure process may move forward while the property is on the market or offer is being negotiated. The timeline could continue even after the short sale has been approved. It is imperative that the listing agent or the seller’s attorney work with the servicer to stop the foreclosure clock from reaching the point of a forced sale (foreclosure) to allow the short sale to close.

FHA Pre-Foreclosure Sale (PFS)

Once the borrower has been approved to participate in the PFS program, FHA will allow a postponement of the foreclosure sale for 120 days.

VA Compromise Sale

It is imperative that the listing agent or the borrower’s/seller’s attorney work with the servicer to stop the foreclosure clock from reaching the point of foreclosure to allow the short sale to close.


Cash Contributions, Incentives, and Subordinate Liens

Some of the short-sale programs have guidelines for assisting the borrowers/sellers with relocation expenses along with caps on what the servicers can require from them as cash contributions.

Fannie Mae and Freddie Mac (Streamlined and Standardized) Short Sale Contribution Requirements

The servicer must not request cash contributions and/or promissory notes where applicable law prohibits a borrower/seller contribution or if a borrower/seller:

  • Qualifies for streamlined documentation, or
  • Is an active duty military service member of the U.S. armed forces with PCS orders relocating the service member from the subject primary residence purchased by the borrower on or before June 30, 2012.

Cash Contributions, Incentives, and Subordinate Liens

When the short sale is done under the imminent default standard, the servicer will evaluate the borrower/seller for the capacity to make a cash contribution if triggered by the borrower/seller cash contribution test described in the following section.

  • The servicer will evaluate the borrower/seller for the capacity to contribute only if triggered by the borrower/seller cash reserve levels or future debt-to-income ratio tests described in the following section.
  • If the servicer concludes that a borrower/seller has the capacity for either a cash and/or promissory note contribution, the servicer must use the guidance described in the next section for setting an initial request. The borrower’s/seller’s total cash and promissory note contribution must not exceed the total amount of the deficiency.
Cash Contributions, Incentives, and Subordinate Liens

Borrower Cash Contribution Test and Formula

The servicer has the ability to ask for cash contributions if assets such as cash, savings, money market funds, marketable stocks or bonds (excluding retirement accounts) stated on Form 710 are:

  • In excess of the greater of $10,000 or;
  • Six times the contractual monthly mortgage loan payment including principal, interest, and tax and insurance escrows (PITI).

If a borrower/seller has cash reserves of more than $50,000, the servicer will request written approval from Fannie Mae for the contribution amount. If the servicer determines that the borrower has the capacity to make a cash contribution, the servicer must initially request a contribution of 20% of the borrower’s cash reserves, not to exceed the deficiency. If the servicer has any thought that the borrower/seller has moved money to another account, e.g., a friend or relative, it will automatically stop the short sale.

  1. Promissory Note Test and Formula
    1. The servicer will evaluate a borrower/seller for a promissory note if the borrower’s/seller’s future debt-to-income ratio (“back-end ratio”) is less than 55%.
    2. The borrower’s/seller’s debt-to-income ratio is based on the borrower’s/seller’s future housing expense, which is calculated at 75% of the current payment.
  2. Relocation Incentive
    1. Owner-occupant borrowers/sellers who have no financial contribution requirements at closing will receive a $3,000 relocation incentive (unless there are employer or state funded assistance for moving).
    2. If the borrower/seller is 90+ days’ delinquent, no financial contribution will be required (owner occupied, second home or investor) and the borrower/seller will receive $3,000 incentive.
  3. Subordinate Liens
    1. Second mortgage payouts cannot exceed $6,000 total.
    2. If the second mortgage holder accepts payment, the second must release the borrower/seller from liability.
    3. Subordinate lien holders may not require a contribution from the agent or borrower/seller.

Non-GSE (Government-Sponsored Enterprise)
Traditional Short Sale

There are no specific guidelines on cash contributions, borrower relocation incentives, or subordinate liens.

FHA Pre-Foreclosure Sale (PFS)

  • Cash Contributions
  • Relocation Incentives
  • Subordinate Liens
  • All additional liens against the property must be released.
  • A lien holder that demands a payment to release its lien must submit a written statement, and an agreement to release the lien if that amount is paid.
  • HUD will allow an amount up to $1,500 for the discharge of junior liens.

VA Compromise Sale

  • A borrower/seller who occupies the property as a principal residence and is required to vacate as a condition of the short sale or deed-in
    -lieu may be eligible for $3,000 in relocation assistance.
  • A tenant in the property may be able to claim the $3,000—no amount may be retained by the borrower/seller if the borrower/seller isn’t the one living in the property. (The tenant would have needed to be residing in the property as the principal residence as of the date the borrower/seller requested HAFA short sale or DIL or resided in the property on the date the executed real estate contract was approved by servicer.)
  • If the property is owner occupied, the borrower/seller may use the $3,000 payment to pay for transaction costs that the borrower/seller has instructed the settlement agent, in writing, to pay on his or her behalf, such as the cost of legal representation in connection with the transaction, overdue utility bills on the property, or minor repairs made as a result of being identified during a property inspection.
  • Borrowers/sellers may not use the relocation assistance payment for release of subordinate mortgage or non-mortgage liens recorded against the property and may not be required as a condition of the sale to utilize any portion of the relocation assistance to pay any transaction expenses.

Subordinate Liens

  • Subordinate mortgage lien holders with subordinate liens may be paid no more than an aggregate cap of $8,500.
  • This cap does not apply to non-mortgage subordinate lien holders with subordinate liens not secured by a mortgage on the subject property, i.e., mechanics liens and HOAs.
  • Subordinate lien holders must release the borrower from financial obligations relating to liens.
  • Subordinate mortgage holders may not require contributions from either the borrower or real estate broker as a condition for lien release.
  • All payouts must show on the HUD-1.

Escalation Processes

If you are working a Fannie Mae short sale and you have one of the following issues you will need to escalate the short sale:

  1. The offer has been submitted more than 30 days prior and there is no response.
  2. A problem arises with a contract and you are in negotiations with the servicer.
  3. There is a policy issue with the handling of your short sale.
  4. If you need to contest value (if no offers are being received OR there is an accepted agreement and there are value issues).

The escalation process is outlined at homepathforshortsales.com.
You will need the same information that was required under “Contesting a Value Assigned by the Servicer or Fannie Mae.”

Freddie Mac requires that all servicers dedicate a toll-free number that is published to borrowers/sellers for the purpose of escalation.

For non-GSE traditional short sales, FHA Pre-Foreclosure Sales (PFSs), VA Compromise Sales, there are unofficial processes in place for escalation of the file to someone who can attempt to resolve the stalemate.

Please note:

  • Do not escalate the file prematurely. Work with the negotiator until there is obviously no way to resolve the issue.
  • If the escalation is due to pricing, have your comparables, repair estimates, and justification for an increase in price ready prior to escalation.

Escalation can slow down the process. Be sure there are no other alternatives and that your borrower/seller has the time to work through the escalation process.


When servicers approve a short sale, they will notify the borrower/seller in writing. The borrower/seller and his or her finance, tax, and legal professionals should review the approval letter closely both for the terms disclosed and for items not mentioned. The approval letter should also be reviewed for any items requiring clarification.



Sample Servicer Approval Letter #1

Dear Borrower:

This letter will serve as Bank C’s demand for payment and advises you that Bank C and its investors and/or insurers have agreed to accept a short payoff involving the above-referenced property (the Short Sale transaction). This demand should be used by the closing agent as our formal demand statement. No additional statement will be issued. This approval is exclusive to the offer by the buyer referenced in this letter. The conditions of the approval are as follows:

  1. Closing must take place no later than February 5, 2017 or this approval is VOID.
  2. The approved buyers are Bob and Carol Smith and the sales price for the property is $260,000.
  3. Another buyer cannot be substituted without Bank C’s prior written approval.
  4. Proceeds to Bank C to be no less than $230,733.51.
  5. Total closing costs, including real estate commission, not to exceed $29,266.49. This figure includes $1,000 for second lien and $3,000 for third lien.
  6. Termite reports and repairs not to exceed $0.00.
  7. Real estate commission not to exceed $13,000.00.
  8. This property is being sold in “AS IS” condition. No repairs will be paid for out of the proceeds unless specifically stated otherwise.
  9. The sellers will not receive any proceeds from this short sale transaction. If there are any remaining escrow funds or refunds they will not be returned to the seller, they will be sent to Bank C to offset the loss.
  10. Bank C or its investors will not pursue a deficiency judgment if the short sale closes on the referenced loan. If the short sale does not

In approval letter #2, note:

  • The bank is forgiving the deficiency on this.
  • The approval date and closing date.
  • Termite issue.
Sample Servicer Approval Letter #2


Date: July 1, 2017
Dear Borrower:
Servicer A agrees to release its security interests in the above collateral upon receipt of $1,000 in certified funds. This amount is for the release of investor A’s security interest only. Please contact your tax advisor regarding any tax ramifications from this transaction.
Servicer A requires that we approve a final settlement statement prior to closing that shows a balance to be paid to Servicer A of no less than $473,285, which will show a real estate commission of no more than $28,397 which is to be included in closing costs not to exceed $52,412.75. Closing shall take place no later than July 10, 2017.
In approval letter #1, note:
• The servicer is releasing security interest only (mortgage).
• There is no mention of releasing the promissory note.
• Clarification is needed to determine if the seller has to pay the deficiency.
• The date of the approval and date of closing.



It is important that the borrower/seller take responsibility to be certain there is a written waiver of deficiency from the servicer when closing on the short-sale transaction. Although a borrower/seller may be bringing funds to closing to contribute to the investor’s bottom line, there still remains a deficiency, and to protect the borrower/seller from receiving a judgment of that deficiency, a written waiver may need to be in place. All of this depends on the recourse debt laws of the state in which the property is located. Here is a sample deficiency waiver from Fannie Mae.




Why Short Sales Fail

Historically, short sales were failing primarily because the servicers were not prepared to deal with them. They took too long to respond and did not have enough manpower to process these transactions, nor did they have a desire to do so. Although there is no guarantee that the servicer will approve the short sale, listing agents have a responsibility to create a contract that has a reasonable chance of closing and to monitor the transaction throughout the approval process. In today’s market, short sales are failing because agents are not aware of the process and forms needed, and because buyers and sellers lack qualification and do not understand the negotiation considerations. It is imperative that agents take responsibility for the success or failure of short sales to the extent that we have control.

Agent Consideration

  • The borrower/seller did not have valid financial hardship.
  • The buyer didn’t do his or her due diligence.
  • The buyer wasn’t qualified.
  • The contract did not have a reasonable chance of closing. Did the buyer:
  • Offer fair price?
  • Tender earnest money?
  • Complete inspections?
  • Make mortgage application?
  • Improper document submission (Equator)

Servicer Consideration

  • The BPO came in high and the servicer thinks the offer is too low.
  • The servicer took too much time and the buyer walked.
  • Junior lien holders or PMI refused.

Problem: Junior Lien Holder Says “No”


The listing agent needs to assess the plan for repayment of debt to the junior lien holders prior to acceptance of an offer. This area of negotiations is a major battlefield. If you know the holder of the junior lien and you can ascertain what they are willing to accept to release their lien, then resolving this prior to seller acceptance of the contract is best.


The payment of what the junior lien holder wants to release the lien does not always have to come from the primary lien holder. Once it is determined how much the lien holder wants, the payment can be made by the seller (if funds are available) or the buyer, or both.


Problem: Short-Sale Package Not Submitted Properly

This is one of the most common reasons why short sales fail. If the package is not complete, servicers typically will not call immediately and tell you what is missing. They will simply set the package aside until they have the time to start making such calls. Other servicers may attempt to communicate with you on the missing pieces, but that alone slows down the process. And still others will terminate the file without informing you.


Submit a complete short-sale package as required by the servicer.


Problem: Offer Too Low

Each servicer has its own formula for what price it will accept on a short sale. There are no hard-and-fast guidelines on what the servicer will approve. This is why the buyer’s representative should have done a thorough CMA for the buyer prior to writing the offer and why the listing agent should have counseled the sellers to counter any offers to establish the best price and terms possible prior to accepting it.

Solution for buyer’s representatives:
Do an accurate CMA and counsel your buyer on making an acceptable offer.

Solution for listing agents:

Have sellers negotiate the best contract they can prior to acceptance and submission to the lender.


Problem: Buyer Not Strong Enough

A pre-approved buyer has a much better chance of getting their contract approved by the lender than one who is only pre-qualified. A cash buyer will need to submit proof of funds. The servicer wants to see a contract that has a strong chance of closing.


Submit thorough buyer qualification information and a strong contract with as few contingencies as possible. From the servicers’ point of view, a contract that stipulates that the buyer will be doing his mortgage application, home inspection, etc., after servicer approval has less of a chance of closing than one where the buyer has already taken the appropriate steps.


Problem: Inaccurate BPOs

As discussed previously, if the BPOs and/or appraisal of the property was inaccurate and the lender has a distorted picture of the fair market value of the property, this could influence the servicer’s approval.


If the contract is not approved, ask the negotiator how the BPOs compared to your CMA and see if there is a problem that can be resolved. Be certain to have interior photos that further support the buyer’s contract terms.


Although length of lender approval is not tracked for all mortgage servicers in the United States, anecdotal feedback from real estate practitioners is that many short sales fail because the buyer simply got tired of waiting.

Solution for buyer’s representatives:

Counsel the buyer on the frustration of time delays.

Solutions for listing agents:

  • Recommend the seller negotiate sufficient earnest money to keep the buyer from backing out as well as negotiate a realistic time frame for the buyer to wait for lender approval in the contract.
  • Keep the lines of communication open between the listing agent and buyer’s representative. This, in turn, keeps the buyer in the loop of communication.
  • Know the process and escalate it when appropriate.



Problem: Doesn’t Meet Servicer or Investor Criteria

Many of the loans we are attempting to do a short sale on have been securitized and sold to investors. The securitization agreement the servicer has with the investor often gives specific parameters of how much the investor can discount the loan in a short-sale situation.9


Submitting a thorough CMA can show the value of the property, but this is where logic sometimes fails and it becomes a “because they said so” situation. You might ask the negotiator how the BPOs compared to your CMA and see if there is a problem that can be resolved.

Many of the loans we are attempting to do a short sale on have been securitized and sold to investors. The securitization agreement the servicer has with the investor often gives specific parameters of how much the investor can discount the loan in a short-sale situation.



Steps in Short Sales from Contracts to Close

  • Follow all servicer requirements
  • Contract and the HUD-1
  • What to highlight in your CMA
  • Submission and servicer approval
  • Postponement of foreclosure proceedings
  • Incentives, cash contributions, and subordinate liens
  • Escalation process
  • Servicer short-sale approval letters
  • Fannie Mae deficiency waiver
  • Why short sales fail

Listing agents must submit short-sale contracts exactly as the servicer requires. Many of the servicers use Equator short-sale processing software, and you will be limited to submitting only those documents that Equator accepts.

Equator is a web-based software program that is being used by many of the larger banks servicers to process their short sales. Equator was originally designed to assist REO agents in the submission of offers and now has become the portal of choice for many of the servicers with short sales as well. Equator.com allows anyone to create an account that then allows you to be able to submit offers to the servicers using the system. The benefit of Equator is that it facilitates and expedites the process. The downside of the system is that if it is not used properly, it can actually slow things down. Here are tips to ensure your short sale gets processed properly.

  1. Follow the instructions exactly as they are spelled out by the servicer. Each servicer has its own process, and its requirements may vary. Although you may have submitted an offer through Equator on a loan serviced by Wells Fargo, that does not mean that the next short sale you submit when serviced through a different entity, for example Bank of America, will be handled in the same way.
  2. The information submitted must match exactly the information on the mortgage documents:
    • The names, addresses of the owners, and the property must be an exact match. For example, don’t enter Bill Smith if mortgage documents list the borrower’s name as William Smith. Include middle initials if applicable.
    • The address must be exactly as shown. If the documents show Drive, do not submit as Dr.; if it shows West Elm, do not use W. Elm.
  3. Always use your information, not the borrowers’/sellers’ information. For example, when entering the phone number and email address, list your number and e-mail address, not the borrowers’/sellers’. The borrowers/sellers, in many cases, have not responded to the servicer’s calls for months and they tend not to respond now.
  4. If you can’t read what you are submitting, neither can the servicers. Be absolutely sure that what you are transmitting is legible:
    • Contracts should be computer generated rather than handwritten whenever possible.
    • Please be sure the scanning and copying equipment you are using gives you a clear, legible image.
  5. Be specific in the naming of the documents. Different servicers have different names for the documents, e.g., Sales Contract or Purchase Agreement. Be sure to name your documents appropriately.

Follow All Servicer Requirements

If the servicer does not use Equator, it is imperative that you determine the process the servicer wants you to follow. Failing to submit all the documents in the proper format will cause unnecessary delays in the approval process.

If a servicer normally uses a fax or general e-mail for submitting documents and the assigned negotiator requests that you use a direct e-mail address, a best practice is to e-mail documents to your negotiator and also e-mail the documents to the general e-mail address or fax it to the number indicated. There are two reasons for this:

  1. The turnover rate for negotiators is extremely high. If you have been e-mailing the negotiator and he or she quits, there is a possibility that all e-mail communications may be inaccessible by the new negotiator.
  2. When you e-mail or fax the “general line,” there is a department that automatically places it into the file. There is less of a chance for the negotiator saying that he or she didn’t receive it.
  1. The listing agent should provide the servicer with:
    1. A copy of the purchase contract
    2. The buyer’s pre-approval letter
    3. A statement that the buyer is not related to the current homeowner
  2. It is critical that the preliminary HUD-1 reflects all costs the investor will incur. The following may be areas of concern:
    1. Tax prorations
    2. Seller concessions
    3. Accurate broker compensation must reflect final contract price
    4. Unpaid municipal expenses
    5. Transfer stamps (if required)
    6. Attorney fees
  • Make sure that nothing is labeled “bill.” In many municipalities when the homeowner is late, it is recorded as a water lien or lawn mowing lien, etc., so be sure you call it a lien, not a bill.
    Also, nothing should be labeled as “Prep” or “Preparation,” as in “Doc Prep” or “Deed Prep.” On the preliminary HUD-1 these fees need to be stated as payable to the name of the person doing the work. These costs are generally the attorney fees.

If the servicer has not previously requested the borrower’s/seller’s hardship and financial information and no price guidance was given, you will need to submit additional information to the servicer at the time of submission of the offer:

  • The borrower’s/seller’s hardship letter, sometimes referred to as RFD (Reason for Default)
  • The borrower’s/seller’s financial information from the Form 710
  • Updated CMA, including marketing history and repair estimate, if needed
  • Preliminary HUD-1 showing all expenses
  • Completed sales contract

Even if the hardship and financial information was submitted and the price was previously set, you will still need to submit the preliminary HUD-1 with the contract.

What is a CMA

The listing agent should create a comparative market analysis (CMA) using the most current comparable sales. This will be an update of the information you have been supplying to the servicer since you listed the property.

Highlight such data as:

  • Average time on market—cumulative market time is critical
  • Number of short sales and REO listings in the area
  • Price trends
  • Recent economic data
  • Absorption rate

What To Highlight in CMA

The absorption rate is the mathematical formula used to establish the relationship between supply and demand in a given market. Used in conjunction with other pricing variables, the absorption rate helps to gauge the time it is likely to take to bring about a sale.

When doing the market absorption portion of a CMA for a servicer on a short sale, the servicer may ask for a one-month base, a three-month base, and then a six-month base for comparison, which will indicate pricing trends in a given market. Servicer representatives are not local pricing experts, and they need to understand where pricing is headed in order to make the appropriate decision on a short-sale contract.

As a reminder, the servicer will order one or two broker price opinions (BPOs) after it receives the short-sale submission package from the listing agent. Listing agents should not mislead the servicer as to the fair market value when updating the CMA and providing it to the servicer. If the CMA ends up being too far below the BPOs, the servicer may view the entire short-sale package in a negative light.

Marketing History

Servicers should be presented with a complete history of showings, feedback, price reductions, and advertising—in short, all the marketing efforts that brought about the contract that is being submitted to the servicer. Listing agents need to show servicers that they’ve done a thorough job of attempting to get the best price possible. For a sample of a market activity report, see Figure 5.1.

Any MLS printouts from when the property was priced should be included as well. The importance of the CMA and marketing history cannot be overemphasized. The servicer is most likely in another state and will not necessarily understand what is happening in your market. The listing agent’s CMA and marketing history are more thorough than a BPO and should include MLS printouts of all property in the area as well as pictures of comparables and on-market properties that are in competition with the subject property.

Repair Estimate for the Property

Providing the servicer with a detailed repair estimate from a reputable (licensed) contractor will assist greatly in getting the short sale accepted. The servicer doesn’t want to own property—and especially not property that needs a complete overhaul.

Some servicers have been known to make some repairs. However, they would much rather sell “as is” and have the buyer make the needed repairs. Two offers netting the servicer the same bottom line—one where the buyer will do their own repairs (buying “as is”) and one where the servicer is asked to do them—usually result in the “as is” buyer being successful.

Many listing agents have created a form (see Figure 5.2 for an example) that they require the buyer and the listing agent to sign to be sure everyone understands the short-sale process.

Each type of short sale has different parameters for contract submission and approval, what closing costs are acceptable (or not acceptable) as well as response times.

Fannie Mae and Freddie Mac (Streamlined and Standardized) Short Sale

  • Arm’s-length transaction
  • Your submission to the servicer must include:
    • Fully executed purchase contract.
    • Seller net sheet or preliminary HUD-1.
    • Borrower authorization form.
    • Listing information, including an MLS sheet showing (1) that the property was on the market a minimum of 5 days (two of which were weekend days) and (2) showing “Active” in the MLS.
  • The borrower/seller may not remain in the property as a tenant or later obtain title or ownership of property. However, if there is currently a tenant in the property, they may stay.
  • Neither the buyer nor the borrower/seller may receive commissions from the sale of the property.
  • All agreements and sales contracts must be disclosed to the servicer.
  • All funds that change hands must be reflected on the HUD-1 and approved by the servicer.
  • Deed restrictions will prohibit re-selling of the property within 30 days at any price or selling property for greater than 120% of short sale price within 31 to 90 days.

Submitting Contract to the Servicer and Registering Offer with Fannie Mae

The listing agent submits the signed contract to the servicer and Fannie Mae now requests that listing agents register accepted offers with Fannie Mae, the investor on the mortgage. Registering the offer with Fannie Mae allows them to proactively work with the mortgage servicer to facilitate faster communications and decisions.

Acceptable Short-Sale Closing Costs

  1. Brokerage fees may be up to 6%.
  2. Typical and customary local and state transfer taxes and stamps.
  3. Title and settlement charges typically paid by the borrower/seller.
  4. Wood-destroying pest inspection and treatment, if usual and customary.
  5. HOA fees past due, if applicable.
  6. Real estate taxes and other assessments, prorated to the date of closing.
  7. Seller’s attorney fees for settlement services typically provided by the title or escrow company.

Unacceptable Short-Sale Closing Costs

  1. Fees paid to a third party by the borrower/seller to negotiate the short sale with the servicer.
  2. Real estate sales commission paid to the borrower/seller or purchaser.
  3. Buyer’s discount points or mortgage loan origination costs.

Servicer Review of Offer and Decision

  1. The servicer must acknowledge the executed contract within 30 days and provide a decision within 60 days.
  2. The borrower/seller must be evaluated and determined to be eligible for a short sale before the offer can be reviewed (710 or “streamlined”).
  3. The servicer may choose to counter the buyer’s offer.
  4. If the offer meets Fannie Mae’s minimum net proceeds, the servicer has the authority to approve the offer. If it is less than the minimum, Fannie Mae must review it.
  5. Once all information has been reviewed and approved, you will receive a final written decision on your submitted contract from the mortgage servicer. If approved, Fannie Mae will provide the borrower with a deficiency waiver.

Short-Sale Affidavit

The short-sale affidavit is a required form that must be signed and serves as a protection to Fannie Mae and Freddie Mac to pursue any party/parties that create a fraud as a result of participating in the short-sale transaction.


Non-GSE Traditional Short Sale

  • Consult with the servicer for its protocol for reviewing and approving short-sale contracts.

FHA Pre-foreclosure Sale (PFS)

Acceptable Closing Costs

  • HUD allows all reasonable costs of the sale, including up to 6% sales commission, local/state transfer tax stamp fees, and other customary seller’s closing costs.
  • HUD allows up to 1% of the buyer’s mortgage amount for closing costs to be included in the “Seller’s Costs” on the HUD-1 for all transactions that involve a new FHA-insured mortgage.

Not Acceptable Closing Costs

Repair reimbursements or allowances

  • Home warranty fees
  • Discount points or loan fees for non-FHA financing
  • Lender’s title insurance fee

Appraisal at the time of contract

The servicer/lender will order a standard as-is FHA appraisal to be completed within ten business days. After the appraisal is received, the file will be reviewed. If it falls in the required parameters, it can be approved by the servicer. If it does not, it may need approval by the investor and/or FHA, which may take more time.

Required Net Salkes Proceeds

Tiered net sales proceeds required during the 120-day marketing period are applicable as follows:

  • For the first 30 days of marketing, the sales contract must equal minimum net sale proceeds of 88% of the as-is appraised fair market value.
  • During the second 30 days of marketing, the sales contract must equal minimum net sale proceeds of 86% of the as-is appraised fair market value.
  • For the duration of the marketing period, the sales contract must equal minimum net sale proceeds of 84% of the as-is appraised fair market value.

VA Compromise Sale

Upon receipt of an acceptable offer, the listing agent and/or the borrower/seller should contact the servicer and advise that they are in the process of submitting a compromise package.

This package should contain the following information:

  • The sales contract is signed by all parties with a contingency that reads: “This offer is contingent upon approval of a VA compromise sale.
  • Good faith estimate projecting closing costs. This document is usually prepared by the listing agent to facilitate processing (e.g., estimated HUD-1).
  • Letter to the servicer requesting consideration of a compromise sale.
  • Financial data and supporting documentation.
  • Compromise Sale Agreement Application.
  1. On loans that originated on or before December 31, 1989, the borrower/seller should be prepared to sign a promissory note at closing agreeing to repay VA for the difference between the sales proceeds and the total debt. This may be waived in order to process the transaction and avoid a foreclosure sale (per state laws or other circumstances).
  2. A current VA appraisal must be obtained. If the buyer is obtaining a VA loan, the buyer’s VA appraisal can be used provided the buyer will agree to the same. Otherwise, the borrower’s/seller’s servicer will have to complete a VA appraisal.
  3. Title is reviewed. In situations where there are second liens or other liens, the borrower/seller can request that the lien holder consider releasing the lien and converting it to a personal loan.
  4. A compromise assumption will not be processed without first receiving a statement from the servicer that they are willing to have their guaranty amount reduced by the amount of the claim payment.
  5. If it appears a compromise assumption is feasible, the buyer must qualify.
  6. Should the VA agree to pay the difference between the sales proceeds and the total debt to complete the compromise sale process, the portion of the homeowner’s entitlement used to guaranty this loan will remain tied up until the VA is reimbursed in full.

The Buyer’s Agent’s Role with Short-Sale and REO Transactions

Considering the hundreds of properties an asset manager may be actively marketing, it isn’t possible to know all of the details about a particular REO property. For this reason, asset management companies typically do not provide a seller’s disclosure and the property is sold “as-is/where-is.” However, known environmental hazards and any material defects found in an earlier inspection (that caused the buyer to cancel the deal) must be disclosed to the next buyer. In addition to federal regulations regarding lead-based paint, state and city regulations may require certain point-of-sale inspections, such as for radon, mold, Chinese drywall, and termites.


Check the remarks in the MLS listing comments for any repairs that need to be done to bring the property up to code or restore it to habitable condition. Additional escrowed funds may be needed to cover the cost of required point-of-sale inspections and correct problems. When point-of-sale inspections uncover issues that need to be corrected, a contractor’s line item job estimate will likely be required (at the buyer’s expense) as an addendum to the sales contract.


Writing the Short-Sale or REO Offer

Let’s say a buyer you are representing has decided on a short-sale property and is ready to make an offer. Before writing the offer, you should:

  • Prequalify the listing agent, the borrower/seller, and the short-sale property by asking the following:
    • Has the borrower’s/seller’s hardship been verified? If yes, by whom?
    • Has the borrower/seller submitted the necessary short-sale documentation to the servicer/investor; for example, if this is a Fannie Mae short sale, has the borrower/seller submitted the Borrower Response Package?
    • Has the listing agent received a response from the servicer/investor?
    • If the short sale is a Fannie Mae short sale, has the servicer/investor established the price?
    • How many liens are on the property?
    • If more than one lien, what are they? IRS tax liens, something else?
    • Has a foreclosure sale date been scheduled?
    • Are there any other offers on the property?
    • Have any other offers been executed and submitted?
  • Check in the MLS or with the listing agent for specific instructions on submitting an offer.
  • Provide a CMA to the buyer client to ensure that the client can make an informed decision on the price to offer. When creating a CMA, buyer’s representatives should include comparable properties that are distressed—short sale, REO.
  • Be certain that the buyer’s lender understands the buyer is intending to purchase a short sale. The buyer’s agent should only refer a buyer to lenders that are familiar with short sales. If the buyer has chosen his or her own lender, a phone call from buyer’s agent to the lender would be appropriate.
  • Counsel the buyer to have the lender order an appraisal after the property inspection has proved satisfactory.
  • Have written repair estimates, if needed, from licensed contractors.

Buyer’s agents also need to educate their buyer clients on the elements of a good offer. Writing an offer on a short-sale property is not like writing an offer on a property that is not distressed. The buyer’s representative needs to be aware of what makes a good short-sale offer that has a reasonable chance of being accepted by the seller and approved by the investor.

Short-Sale_Negotiation_Considerations_for_Buyers (1)



Making Offers on Multiple Properties at the Same Time

Often buyers believe the best strategy in “getting”a short sale is to put offers on several short-sale properties at the same time. If those offers are accepted by the sellers, the buyers have entered into contracts to purchase more than one property. Buyers should be cautioned that this is a risky practice (unless they intend to purchase both properties). If your buyer client insists on pursuing this strategy, seek adv


Lowball Offers

Buyers also may be tempted to make a lowball offer on a short-sale property. An exceptionally low offer runs at least two risks if the offer is accepted by the borrower/seller and the contract is sent to the servicer for investor approval:

  • For some borrowers/sellers, the foreclosure clock will continue to tick away (which may put the borrower/seller in imminent danger of foreclosure) while parties wait for the servicer to review the contract and ultimately not approve it.
  • Buyers may miss out on other properties that would have been suitable and available while waiting for the servicer’s response.
  • Remember, it is the duty of both the buyer’s agent and seller’s agent to protect and promote the interests of their clients. Both agents have a duty to negotiate the best price and terms for their client prior to the contract being submitted to the servicer for approval.

Length of Time for Investor Approval and Closing

  • The approved short-sale addendum to the sales contract that is used in your marketplace to make the contract subject to investor approval should stipulate how long the buyer will wait for short-sale approval.
  • If the time allowed for investor approval is too short, it will weaken the buyer’s contract. Note that the time allowed for investor approval will depend upon the type of short sale. For example, you may be able to have 30–60 days’ waiting period for approval from Fannie Mae or Freddie Mac. However, for non-GSE short sales, you may need 90–120 days’ wait time for approval.

Earnest Money Requirements for Short Sale

Earnest Money

  • As with any real estate contract, the earnest money on a short sale is due according to the terms of the written agreement.
  • Earnest money should be deposited as required by state license law based on the date the contract was signed by the buyer and seller—not based on when the contract is approved by the servicer.
  • If the buyer does not want the earnest money deposited before the servicer has approved the contract, the buyer’s representative should note that on the contract. Accordingly, the buyer should not tender the earnest money before the date for agreed to for deposit.
  • It is important to know your state laws on earnest money or deposits. Some state laws stipulate that there cannot be a valid contract without earnest money. This would, obviously, affect how the offer was written.
  • Listing brokers should be wary of accepting personal checks for earnest money too close to the closing date. Many servicers do not allow more than ten days to two weeks for closing after they have approved the short sale. If the check does not clear, there could be problems.
  • Without sufficient earnest money, a buyer may not hesitate to walk away from the transaction. The greater the amount of the earnest money, the greater the chance of the buyer being committed to the contract.

Home Inspection

  • If the contract calls for the home inspection to be done in five business days after the contract has been executed, the five days would start from the time of signing by the buyer and seller—not from the time of lender approval.
  • The buyer will have little success negotiating any costs or repairs if the home inspection is completed after the servicer’s approval. The servicer’s approval is based on a minimum dollar amount to be realized at the closing, and servicers generally do not allow for further negotiations.
  • Most often, a short sale is an as-is transaction. The seller doesn’t have the money to make the repairs and the servicer is unwilling to make repairs. That stated, the buyer still has the right to know what as-is means and withdraw the offer or reduce the offer based on the home inspection.
  • Buyers may end up wasting valuable time on a property that they may not want to purchase as a result of a home inspection that reveals less-than-acceptable defects in the property.
  • Although the short-sale approval process takes more time than a non-distressed sale, once approved, the closing date stipulated in the approval letter may not allow the buyer sufficient time to complete a property inspection.

Mortgage Application and the Appraisal

➢ The buyer must submit the mortgage application according to the contract as well. There is often a quick turnaround between lender approval of the short sale and the lender’s required closing date. The buyer must be ready, willing, and able to meet the specified closing date without asking for more time to get their financing in place.

➢ Often the buyer’s appraisal does not get ordered until the home inspection and possibly attorney modification periods have been satisfied or waived. For this reason, it is essential that enough time be allowed on the contract for the buyers’ loan commitment.

Contract Acceptance

  • Either party could back out without penalty if the offer is not signed.
  • There is no contract until the contract and short-sale addendum are signed by the buyer and the borrower/seller.
  • Typically, servicers will not accept digital signatures. Best practice is to have the buyers and borrowers/sellers sign in hard copy.
  • The fact that the borrower/seller accepts the contract contingent on servicer approval does not guarantee servicer approval. The approval by the servicer is an additional contingency, like a home inspection, mortgage approval, etc., and should be treated as any other contingency.
  • The borrower/seller may choose to continue to market the property looking for back-up contracts.


MLS rules and the NAR Code of Ethics require that the listing agent disclose the existence of an accepted contract, including those with unresolved contingencies, to any broker seeking cooperation. Once a short-sale contract has been executed, it should be reported to your MLS as the MLS rules require. Servicers do not require that the property remain on the market after an offer has been accepted. A borrower/seller would not be able to accept another contract unless it was made “subject to release of prior contract,” and servicers generally do not want back-up offers submitted.

The NAR Code of Ethics requires that all offers must be presented to the seller all the way to closing. Howe


REO Financing

Purchasing a home that needs substantial repairs presents a predicament because a bank won’t approve a mortgage on a home until repairs are complete, and the repairs can’t be accomplished until the purchase closes. The FHA 203(k) mortgage program offers a solution. The program allows a buyer to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements, so there is just one loan and one closing. Two types of FHA 203k renovation loans are available, standard and streamline. The standard loan is typically for more extensive rehab projects, while the streamline loan covers a maximum of $35,000 of repairs. The FHA requires just a 3.5 percent down payment, based on the purchase price and total project cost. The buyer must plan to live in the property he or she is buying.

For detailed information on 203(k) mortgage programs, visit https://www.hud.gov/ and search for “rehab a home with HUD’s 203(k).”


The TILA-RESPA Disclosure Rule for Short Sales

  1. In 2015, the Consumer Financial Protection Bureau (CFPB) finalized the Truth in Lending Act (TILA) Real Estate Settlement and Procedures Act (RESPA) Integrated Disclosure rule, or TRID, also known as “Know Before You Owe” mortgage initiative. Because borrowers were struggling to understand the overlapping information and complicated terms in the existing federal mortgage disclosures, TRID consolidated them into two simplified documents:
    1. The Loan Estimate, which replaces the Good Faith Estimate document
    2. The Closing Disclosure, which replaces the HUD-1 Settlement Statement
  2. The Loan Estimate giver borrowers mortgage details in concise, easy-to-understand language. It must be provided to borrowers within three business days of receipt of their loan application. The Closing Disclosure details mortgage closing costs and other loan details. It must be provided to the borrower at least three business days prior to closing. TRID implemented this three-day waiting period to give consumers time to review their Closing Disclosure and ask questions before closing. Agents should keep this in mind to avoid any delays at closing time.
  3. To best prepare their clients for financing a home, the CFPB recommends that agents take following five steps:
    1. Encourage clients to think through their mortgage choices first.
    2. After they have found a property, encourage them to apply for Loan Estimates from multiple lenders. Loan Estimates no longer require written documentation.
    3. Make sure your clients indicate their intent to proceed.
    4. Provide clients with accurate and timely information about the property and transaction.
    5. Find out who provides the Closing Disclosure.


  4. Although in the past a settlement agent, attorney, or closing company usually provided the HUD-1 Settlement Statements, lenders might deliver the Closing Disclosure directly to your client. The CFPB recommends checking with the lender and with state regulations, as practices can vary.For more information, consult the CFPB’s Real Estate Professional’s Guide at


IF your client has decided on a short-sale property and is ready to make an offer, you should take the time to “prequalify” the listing agent, the borrower/seller, and the short-sale property before writing the offer. This can be accomplished by asking questions such as “Has the borrower’s/seller’s financial hardship been verified?”, “Are there any other offers on the property?”, and “How many liens are on the property?”

What Is a REO Property?

REO stands for real estate owned. It is the term that lenders—bank and government—use to describe property that they come to own because a borrower can’t keep up with mortgage payments. When a lender reclaims a home and wipes out any money due on the mortgage, it offers the property for sale as a REO. The property is usually sold as-is, even if it needs repairs.

How does a property go from a family home or place of business to a bank-owned asset? As the following diagram illustrates, the most common path begins with a default on mortgage payments leading to foreclosure.

REO property

Who Owns and Buys REO Properties?

Government Sponsored Enterprises (GSEs) own millions of REO properties. Other government entities—such as HUD, the VA, the USDA, and the Department of Treasury/IRS—also own real estate as a result of loan defaults, unpaid taxes, or criminal activity. Small and large banks own portfolios of real estate as a result of mortgage defaults. In particular, three big banks—Bank of America, Chase, and Wells Fargo—own large portfolios of REO properties.

Now, let’s take a look at the other side of the transaction—the REO buyer. There are three types of REO buyers:

  1. Investors: Investors buy and hold REOs in hopes of future value appreciation, fix and rent them for an income stream, or fix them and flip them in hope of making a profit.
  2. Home buyers: Discounted property prices offer opportunities for first-time and repeat home buyers and second-home buyers, too.
  3. Communities and non-profits: Community groups and non-profit organizations may purchase REO properties and fix them up to put in a new owner or sell as a fundraising opportunity. In fact, some non-profits now have real estate licensees on staff to handle the property investments.


  • Considering the number of properties that must be recycled into the housing stock, the REO market is likely to be with us for years to come, particularly in the hardest hit areas. But is the REO business a good fit for you personally and professionally?
  • If you decide to make REOs part of your real estate business, it is essential to understand that REO transactions follow different time frames, procedures, and sequences compared to traditional transactions. For example, the REO listing comes to an agent by assignment from the asset manager; no listing presentation involved. REOs are an as-is/where-is, bottom-line business. Successful asset managers are very detail and deadline oriented, and they expect the same of their listing agents.
  • Be prepared to roll up your sleeves and get dirty. If you are squeamish about dirt and disorder, working in the REO market may be a struggle. You will encounter some properties in very poor condition: dirty, moldy, trash filled, stripped of wiring and pipes, or vandalized. You must have the fortitude to go into difficult situations and troubled neighborhoods or come face-to-face with distressed and/or angry homeowners. REO agents need to be confident in what they are doing but not confrontational. Be respectful and acknowledge homeowners’ hardship, but stay focused on your responsibilities. And if a situation feels unsafe, leave and call for help—law enforcement or your teammate.


REO service activities can easily cross the line between sales and property management. Before you start working in the REO market, do the following:

  • Check with your state’s real estate licensing authority to make sure your license covers all the activities you’ll be performing on behalf of asset managers
  • Make sure your firm’s errors and omissions and other insurance policies like personal liability and workmen’s compensation adequately cover your REO activities.
  • You’ll need a start-up capital fund. Asset managers will expect your firm to advance payments for expenses like utility hookups, minor ($300–$500) repairs, and required point-of-sale inspections. Be prepared to wait up to 60 days for reimbursement after you submit the claim. How much capital will you need? Experienced REO professionals advise a start-up fund of about $5,000 or $1,500 per property.
  • Consider whether the REO business is a good match with your broker’s business strategy, value proposition, and management systems. Without the support of your broker, sales team, and back office, you could struggle to succeed.

Traditional Versusu REO Transactions


Practitioner Perspective

Persistence, tenacity, follow-up skills
In order to make it in this business, I think the agent needs to have a certain soundness of mind, persistence, tenacity, and a strong constitution. In some properties, just the sight of the conditions could turn you off. If you’re not one to take good orders or follow instructions, you want to do it yourself, or you think you have a better way, working with asset managers might not be for you. Good communication skills, computer skills, and follow-up skills–these are what you need in order to make this business work.

Courage and empathy
When you go out to do an occupancy check, what is on the other side of the door is probably fear. But many times, people have said to me, “We’ve been waiting for someone to contact us and you are the first one who talks to us as a person. We’ve had people come to our door and threaten us. Why are you being so nice?” I’ll say, “There’s no reason not to be nice. What’s happening to you and your family is a horrible situation. I’m sorry for your hardship.” The seller wants them out of the house, but I have to give them the respect and dignity they deserve and let them make a dignified exit. If you don’t know what it’s like to lose everything you own, don’t say “I know what you’re going through,” because you really don’t.

You have to make it happen
You just can’t sit and wait for something to happen in this business. You have to make it happen. Years ago, we used to do homebuyers seminars, now we do investor seminars. This is how we actually make the business work for us. We present our portfolio and let investors know what’s available. We collect names and e-mail addresses so that when we get a listing that meets an investor’s criteria, we get in touch. Our investor seminars also attract home buyers who might be able to purchase the property with a 203(k)-rehab loan. So, our advertising says “investors and 203(k) buyers welcome.”

Work with REO buyers
When agents ask how to get involved, I say that it might not be involvement as the listing agent, but as a buyer’s agent. Working the buy side usually won’t get you the contacts with asset managers. But the agents I know who are strictly buyer’s agents for REOs like it that way.

Building Your Network

Asset managers need to know their listing agents better than the properties, because, with responsibility for a few hundred properties, the asset manager can’t possibly keep tabs on the details of every property. Depending on the size of the territory and number of properties, an asset manager will probably maintain a go-to network of 12–15 real estate agents on whom they can rely. In contrast, in active markets, real estate professionals need to cultivate working relationships with the asset managers at the companies that do most of the REO business in the market area. That handful of (3–5) asset manager contacts will be the source for most of your REO business.

Many of the major asset management companies, including the GSEs, enable online registration for real estate agents. Fill out the application and attach a résumé if possible. Some of the major asset management companies that provide REO outsource services for major lenders and the GSEs include:

  • 24 Asset Management
  • Atlas REO
  • Advent REO
  • First Preston Management
  • Keystone Asset Management
  • Old Republic Default Management Services

REO conferences, such as those sponsored by The Five Star Institute (www.TheFiveStar.com ) and REOMAC (www.reomac.com ), provide a place for outsource companies, asset managers, and real estate professionals to meet face-to-face and make network contacts. Attending a conference means an investment of time and money, but for some real estate professionals, the payoff is worth it in terms of education and contacts.


Educating the Buyer Client

In previous modules, we concentrated on the list side of the short-sale transaction—the role and responsibilities of the listing agent and how agents should take a short-sale listing. What are the buyer’s agent’s responsibilities in short-sale transactions? And what if the buyer client is interested in an REO property and not a short sale? Since the purchase of short sales and REOs are subject to different constraints, not all buyers are good candidates for both types of distressed transactions. Buyer’s representatives should counsel their clients on the differences between these types of transactions during their initial needs assessment. A counseling session not only sets parameters but also closes the potential gap between buyers’ perceptions and market realities. In addition to talking about needs, wants, price, and location parameters, buyers need to be realistic and understand what they could be getting into.

Whether the buyer is considering a short sale or REO property, these transactions share the following:

  • Buyers must understand the process and realize they are not in control.
  • Buyers must be willing to get pre-approved.
  • Properties are sold as-is.
  • Lenders/servicers will not approve an offer to purchase that contains a home-sale contingency.
  • It can be difficult to get closing costs covered or cash back for the buyer.
  • The worksheet and checklist later in this module can be used in addition to any standard buyer qualification worksheet currently used.

short sale amnd REO transaction Differ

buyers conseling workesheet




Steps in the Listing Process in Short Sale

  1. Contact the servicer or visit https://www.homepathforshortsales.com and select “Request List Price Guidance.”
  2. Expect a BPO and appraisal to be performed on your client’s home. The BPO and appraisal results will help set the recommended list price.
  3. Fannie Mae now requires both a BPO and an appraisal, which may take up to three weeks to complete. Let the borrower/seller know that a BPO agent and appraiser will need access to property. Any delays in homeowner response or inability to gain access to the property will delay receipt of a recommended list price.
  4. List the property at the low end of the fair market value determined by your comparative market analysis (CMA) as “Active” in the MLS.
  5. Although you may have the property listed at a price you believe to be accurate based on your CMA, advise your client that an agent and appraiser will need access to the property to complete the BPO and appraisal. Any delays in homeowner response or inability to gain access to the property will delay receipt of a recommended list price.
  6. Fannie Mae or the servicer will provide a recommended list price in accordance with maintaining property values using a BPO and an appraisal.
  7. After completion of a BPO and appraisal, contact your client’s mortgage servicer for the recommended list price. The price may be where you have it currently listed or the price may need an adjustment. If you believe the property price is too high or too low, you may escalate your concern to Fannie Mae through https://www.homepathforshortsales.com.

Contesting a Value Assigned by the Servicer or Fannie Mae

If you believe that the recommended list price Fannie Mae has given is inaccurate, you will need to contest the value. Before you submit an inquiry about an active short sale to Fannie Mae, make sure you have all the information you need:

  • Your name, phone number, and e-mail address
  • Real estate brokerage name
  • Borrower’s/seller’s property address
  • Loan number(s) (servicer and/or Fannie Mae’s)
  • Servicer name
  • Signed Borrower Authorization Form (authorization to release financial information)
  • Property foreclosure sale date (if known)
  • Your point of contact at the mortgage servicer as well as the contact’s phone number and e-mail address
  • Gross offer amount, if you have an offer*
  • List significant value-related issues (e.g., the property has a septic system, foundation problems, and/or defective drywall)
  • Your recommended value
  • 3–6 comparable properties sold within the last six months with listing history and agent comments—traditionally the servicer does not want short sales or foreclosures to be used
  • Any additional documents from this list to support the case:
  • Borrower’s/seller’s appraisal
  • CMA report with comp photos, descriptions, and listing history
  • Inspection report with color photos of repairs
  • Contractor estimate(s) with color photos


If you have a borrower/seller who has not made initial application with Fannie Mae for a preapproval (i.e., submitted the Form 710), you may submit a Borrower Response Package with the short-sale offer.

  • Freddie Mac Standardized Short Sale
    • The steps in the Freddie Mac Standardized Short Sale listing process are very similar to the Fannie Mae process with the exception of setting a list price. Freddie Mac is not involved in setting the price. It is up the listing agent to prepare a CMA and discuss list price with the borrower/seller. Once the servicer receives the short-sale contract, a valuation will be obtained electronically by the servicer. The valuation will include the Freddie Mac minimum net proceeds amount. If the proceeds of a sale meet or exceed the Freddie Mac minimum net proceeds amount, the servicer will be able to approve the short-sale contract price and proceed with the transaction.
  • Non-GSE Traditional Short Sale
      1. Have the borrower/seller complete the appropriate Authorization to Release Information form.
      2. Contact the lender or servicer to determine its protocol for doing short sales.
      3. Generally, you will list the property at fair market value and the lender or servicer has no more involvement until there is a signed contract with a buyer.

      If the lender/servicer does not get involved in setting the price at the time of listing, one of the listing agent’s primary goals is to price the property so the seller receives an offer from a qualified buyer with a realistic chance of closing. Some agents advertise short sales at unbelievably low prices with the hope that a buyer will be enticed to submit an offer. Other agents set the list price too high to attract an offer. Still others list the property at what the seller needs rather than what the property is worth. The proper price should be fair market value. Fair market value is the price a buyer will pay and a seller will accept for a property under reasonable and ordinary conditions. This definition assumes an arm’s-length transaction; meaning that the buyer and seller are not related to one another and neither is under any pressure to complete the transaction. However, when under pressure, such as the need to immediately relocate, either the buyer or seller may entertain a price that differs substantially from what would be considered otherwise.

  •  FHA Pre-Foreclosure Sale (PFS)
    • The borrower/seller must submit the Request for Pre-Foreclosure Sale and Affidavit to the lender or servicer. The lender or servicer will also require financials and other documents to allow them to approve the borrower/seller for a short sale.
    • The borrower will receive an Approval to Participate form, which will state the price the home is to be listed for as well as the net amount that will be acceptable for approval of the short sale.
    • The investor delays foreclosure to allow for the pursuit of the short sale for four months from the date of the Approval to Participate letter.
    • The borrower/seller can list the property at any time during the process. They do not need to wait for the Approval to Participate to be issued.
    • The property must be listed by a licensed real estate broker, in a local MLS if one is available for that area, and the broker cannot be related to the seller.
  •  VA Compromise Sale
    • VA does not require any paperwork prior to the time a contract is accepted on the property. However, it does have requirements for doing a short sale:
      • The property must be sold for fair market value.
      • The closing costs must be reasonable and customary.
      • The compromise sale must be less costly for the government than foreclosure.
      • There must be a financial hardship on the part of the seller.
      • On loans that originated on or before December 31, 1989, the lender must be willing to write off any debt above the max guaranty.
      • There must be no second liens or other liens (unless the amount is insignificant).
      • In situations where there are second liens or other liens, the seller can request that the lien holder consider releasing the lien and converting the loan to a personal loan.
  • U.S. Treasury HAFA Short Sale
      1. The property must be listed with a licensed real estate professional who regularly does business in the community where the property is located.
      2. Either a list price approved by the servicer or acceptable sales proceeds will be stated in Short Sale Notice to the borrower/seller.
      3. The property must be listed for not less than 120 days and may be extended for up to a total term of 12 months.
      4. The borrower/seller is responsible for property maintenance and repair.
      5. The servicer must have a policy on re-evaluation of value and reconcile any discrepancies between the servicer’s independent assessment of value and the market value data provided by the borrower/seller or the borrower’s/seller’s real estate broker.
      6. If the new value determination is less than the value determined by the initial Short Sale Notice (SSN) to the borrower/seller, the servicer must notify the borrower/seller and real estate broker in writing and confirm the new list price or acceptable net proceeds based on the new value. Servicers may not increase the minimum net proceeds required until the expiration of the terms of the short-sale notice (120 days).
  • Servicer response times:
    • The servicer must consider the borrower/seller for HAFA within 30 calendar days of receiving the request.
    • If the servicer is unable to respond within 30 days, the servicer must send a written status notice to the borrower/seller on or before the 30-calendar-day deadline.
    • The servicer must then follow-up with written updates every 15 calendar days until the servicer is able to provide a short-sale notice or DIL agreement.
    • The borrower/seller has 14 calendar days from the date of notification to contact the servicer by verbal or written communication and request consideration.
    • The servicer must notify the borrower of HAMP if the servicer determines that a loan modification could be an option.
    • If an executed contract is submitted with request for short sale, the servicer must respond within 10 business days along with the Hardship Application or request for mortgage assistance (RMA). The servicer must approve the request for short sale within 30 days or notify the borrower/seller with written status updates every 15 days until the request is approved or not approved.