- 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
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.
- 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.
- 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.
- 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.
- 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.
- 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:
- 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.
- 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.
- The listing agent should provide the servicer with:
- A copy of the purchase contract
- The buyer’s pre-approval letter
- A statement that the buyer is not related to the current homeowner
- It is critical that the preliminary HUD-1 reflects all costs the investor will incur. The following may be areas of concern:
- Tax prorations
- Seller concessions
- Accurate broker compensation must reflect final contract price
- Unpaid municipal expenses
- Transfer stamps (if required)
- 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.
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.
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
- Brokerage fees may be up to 6%.
- Typical and customary local and state transfer taxes and stamps.
- Title and settlement charges typically paid by the borrower/seller.
- Wood-destroying pest inspection and treatment, if usual and customary.
- HOA fees past due, if applicable.
- Real estate taxes and other assessments, prorated to the date of closing.
- Seller’s attorney fees for settlement services typically provided by the title or escrow company.
Unacceptable Short-Sale Closing Costs
- Fees paid to a third party by the borrower/seller to negotiate the short sale with the servicer.
- Real estate sales commission paid to the borrower/seller or purchaser.
- Buyer’s discount points or mortgage loan origination costs.
Servicer Review of Offer and Decision
- The servicer must acknowledge the executed contract within 30 days and provide a decision within 60 days.
- The borrower/seller must be evaluated and determined to be eligible for a short sale before the offer can be reviewed (710 or “streamlined”).
- The servicer may choose to counter the buyer’s offer.
- 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.
- 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.
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 a 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 a 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 a 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 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.
- 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).
- 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.
- 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.
- 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.
- If it appears a compromise assumption is feasible, the buyer must qualify.
- 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.