Short Sale Course California Real Estate

Some sellers may choose bankruptcy. While bankruptcy has its appeal (i.e., relief from the burden of debt), it causes long-term damage to a person's credit rating. It also has a stigma attached to it that a short sale does not, which may or may not weigh heavily when the homeowner applies for a new mortgage in the future. The rule of thumb has been that bankruptcy has a negative impact on a person's credit score for up to 10 years, while a short sale may only show up for two to three years. But a person applying for a new mortgage must have at least a 640 credit score, a 20 percent down payment, and a clean record for at least the past two years. This will be difficult for those who've been through a short sale to accomplish, so before you make promises to your client like, "A short sale is just a two-year hiccup, and you can qualify for a new home in two years," it's best to direct your client to their financial advisor who can explain all of the ramifications. Sometimes, bankruptcy is the best option, so never find yourself steering a client toward one decision or another. A decision to sell short, file for bankruptcy, or go into foreclosure is one that should be made only after thoroughly investigating all of the options and only after consulting legal, financing, and housing counselor experts.

Another alternative is deed-in-lieu-of foreclosure. A seller who prefers to avoid the whole short sale process, and wants to avoid the emotional and societal stigma of either bankruptcy or foreclosure, may opt instead for a deed-in-lieu-of foreclosure. With a deed-in-lieu of foreclosure, the seller gives up all rights to the property and transfers the deed to the mortgage holder, who can then proceed with a sale. To proceed with a deed-in-lieu, both parties must agree to and sign both an Agreement in Lieu of Foreclosure, which outlines the terms of the deed, as well as the deed itself, which transfers legal ownership of the property. In certain situations, the homeowner may be asked to pay to reduce the debt and to protect their credit rating. After an agreement is reached, the lender then classifies the original loan as paid and issues a waiver to deficiency judgment, which would normally go into effect in case the sale of the property results in an amount less than the debt. (This is something to advise your clients to watch out for, and to negotiate out of the contract if at all possible.) As with any alternatives to a short sale (and the short sale itself), prior to proceeding with a deed-in-lieu of foreclosure, advise your client to seek expert assistance (e.g., a housing counselor, tax advisor, attorney, etc.).

ongratulations! You successfully passed your quiz. Click below to return to the Table of Contents and continue your course. 1. Compared to a home built in 1985, a home built in 1930 _______. A. will always be worth more, because it`s classic B. will always be worth less, because it`s dated C. may be worth more or less, depending on the neighborhood Congratulations, this is the correct answer! D. should not be listed due to lead paint concerns 2. As a buyer`s agent, what should you tell a buyer about their accepted offer from a short sale seller? A. That closing is imminent B. That no more offers will be accepted C. That the lender will need to approve the sale Congratulations, this is the correct answer! D. That the property is a great bargain 3. Which of the following is NOT a red flag for possible mortgage fraud? A. A property that is deeded back to a short sale seller`s cousin B. A BPO that seems too high C. A BPO that seems too low D. A short sale that sells to the first buyer who makes an offer on it Congratulations, this is the correct answer! 4. The comparable homes in the Branching Bee neighborhood are selling in 30 days, on average. Homes in other neighborhoods are generally selling after 90-120 days. When estimating an appropriate listing price for a home in the Branching Bee neighborhood, you should suggest _______. A. listing at a higher price This is the correct answer B. listing at a lower price This was your answer, which is incorrect. C. holding on to the property for another 6 months to build equity D. listing at an extremely low price that you know the lender will not approve Feedback: Current market conditions, especially typical time on market stats, must figure prominently in the CMA. If comparable homes in the area are selling in an average of 140 days, but homes in this neighborhood sell in 30 days, you have a hot property and can price accordingly. The reverse is true as well: if the neighborhood is a slow mover, the home will likely not fetch as high of a price as faster moving areas. 5. Lenders may not be willing to speak to you about your client`s property until _____. A. you give up any claims to a commission B. you have written permission on the seller authorization form Congratulations, this is the correct answer! C. the foreclosure proceedings are in full swing D. the sellers meet with the lender in person to explain the situation 6. Fraud for property usually involves ______. A. misrepresentation by a buyer when applying for a loan This is the correct answer B. misrepresentation by a seller determined to sell C. misrepresentation by a listing agent This was your answer, which is incorrect. D. misrepresentation by a lender Feedback: Fraud for property usually involves individuals, and the most typical form is misrepresentation by the buyer when applying for a loan. 7. When submitting a short sale offer to a lender for approval, a large earnest money deposit from the buyer _________. A. makes no impact on the lender B. can be considered a type of mortgage fraud C. can sway a lender toward approving the sale Congratulations, this is the correct answer! D. will likely push a lender toward rejecting the sale 8. Why should a listing agent obtain an O&E report prior to listing a short sale? A. It is important to know the insurance policy for the property B. It provides competitive market information C. It shows recent work done on the home D. It provides a list of encumbrances on the property Congratulations, this is the correct answer! 9. Which of the following items should be included in the short sale package sent to the lender for approval? A. The buyer`s preapproval letter Congratulations, this is the correct answer! B. Local statistics on job losses and unemployment C. A passionate letter from the buyer detailing how much they love the home D. Pictures of the sellers 10. When comparing fraud for property to fraud for profit, fraud for profit is usually A. simpler and more lucrative. B. more extensive and elaborate. Congratulations, this is the correct answer! C. more prevalent. D. more open. 11. The lender is not convinced that the listing price is fully justified. What could you add to further justify the price? A. Pictures of the seller, now 8 months pregnant B. Pictures of the empty street with all the "foreclosure" signs This was your answer, which is incorrect. C. Statistics regarding the state unemployment rates D. Bids from contractors to make needed repairs This is the correct answer Feedback: If the property needs repairs or updates to bring it to today`s market standards, try to obtain contractor bids. Estimates don`t fly well with lenders, but concrete bids will. This will help you not only justify the sales price you`ve arrived at, but will be a strong signal to the lender of the type of expense that may be required to prepare the property for market should the lender foreclose.� 12. Why is preparing a CMA for a short sale more difficult? A. There aren`t enough short sales on the market for comparisons. B. Short sale sellers are hard to convince of a price. C. The price has to be justified to the lender. Congratulations, this is the correct answer! D. Short sales are typically found in low-income, crime-ridden neighborhoods.

Congratulations! You successfully passed your quiz. Click below to return to the Table of Contents and continue your course. 1. Why might a seller pull out of a short sale even after the buyer`s offer is accepted? A. The seller may realize debts and taxes will negate any benefit from the short sale. Congratulations, this is the correct answer! B. The lender may offer to buy the property from the seller C. The seller may decide to keep the property because of its appreciated value D. The seller may want to start a bidding war, hoping to get an above market price. 2. When discussing possible listing price reductions with a client, what is a standard amount of time to wait before lowering the price? A. The average time houses sell in that area Congratulations, this is the correct answer! B. Thirty days, no exceptions C. Six months D. One year 3. Which of the following is likely NOT mortgage fraud? A. A "loan for a day" B. An undisclosed simultaneous closing C. A junior lender who accepts payment from a primary lender to allow a short sale Congratulations, this is the correct answer! D. A junior lender who receives a payment from a seller after the short sale closes 4. Manny, a real estate professional, is representing the Bards, who plan to list their home as a short sale. While the Bards work with a HUD-counselor, Manny calls their lender and asks the lender "what is the lowest price you will accept for this property?" What did Manny do wrong? A. Manny needs permission from the Bards before calling their lender Congratulations, this is the correct answer! B. Real estate professionals should never call lenders C. Real estate professionals should never ask lenders what their lowest acceptable amount is D. The Bards should not work with a HUD-counselor if they are short selling 5. What must a listing agent do prior to contacting a lender to negotiate on the client`s behalf? A. Meet with an attorney B. Require an up-front fee C. Obtain written permission from the client Congratulations, this is the correct answer! D. Advertise as a short sale negotiator 6. Sarita`s listed property is in the Willow Oaks development, in the section that faces a busy highway. Half of the properties in Willow Oaks face the golf course, and there are more recent sales of these homes. When using other properties in this neighborhood in the CMA, Sarita should _________. A. only include houses on the golf course side, because they are worth more B. only include houses on the highway side, because they are worth less This was your answer, which is incorrect. C. include similar houses from both sides, but clearly explain the difference and adjust price estimates accordingly This is the correct answer D. include houses from different neighborhoods to give a broader view of the market Feedback: Remember that the lender will likely not even know the neighborhood, let alone its idiosyncrasies, so proof of any differential will be necessary. It may be necessary to include maps to show where the home is located in the neighborhood, proximity to schools, busy streets, etc. 7. As a buyer`s agent, what should you tell a buyer about their accepted offer from a short sale seller? A. That closing is imminent B. That no more offers will be accepted C. That the lender will need to approve the sale Congratulations, this is the correct answer! D. That the property is a great bargain 8. Mike has just purchased a condo in a short sale. Prior to closing, he asks you, his agent, who will be responsible for the association fees that are unpaid. How do you respond? A. "The lender." B. "The seller." This is the correct answer C. "You are." D. "These are waived in a short sale situation." This was your answer, which is incorrect. Feedback: The seller is responsible for the association fees that are not current. 9. Which of the following is NOT a red flag for possible mortgage fraud? A. A property that is deeded back to a short sale seller`s cousin B. A BPO that seems too high C. A BPO that seems too low D. A short sale that sells to the first buyer who makes an offer on it Congratulations, this is the correct answer! 10. If the Closing Disclosure form shows that the seller will pay closing costs, the seller`s lender will likely ___________. A. reject the agreement This is the correct answer B. approve of the agreement This was your answer, which is incorrect. C. demand the seller pay an equal amount to the lender D. demand the listing agent give up all commissions Feedback: Most lenders will not approve a short sale if the seller is paying the closing costs. 11. A good place to report mortgage fraud would be all of the following EXCEPT A. Minnesota Attorney General Office B. U.S. Department of Justice C. Police department Congratulations, this is the correct answer! D. FBI 12. The lender is not convinced that the listing price is fully justified. What could you add to further justify the price? A. Pictures of the seller, now 8 months pregnant B. Pictures of the empty street with all the "foreclosure" signs C. Statistics regarding the state unemployment rates D. Bids from contractors to make needed repairs Congratulations, this is the correct answer! Retake Exam Continue Course

Fraud for profit is more extensive and elaborate. Usually fraud for profit is perpetrated with the help of several people, is often a sham business, and may involve: Multiple loans Elaborate schemes. Examples of fraud for profit schemes include the "straw buyer" where a loan applicant is used to obtain a mortgage and disguise the true buyer and the true nature of the transaction. This is usually an "inside job" where the straw buyer purchases the short sale for a cheap price, and then transfers the title to the real purchaser after the sale closes. Some types of "inside jobs" involve the real estate agent. For instance: The listing agent presents his own (or another's) low-ball offer to purchase to the lender, but does not present other higher offers received. The listing agent purchases the property through a company that the agent is part-owner in. In both of these cases, after the transaction closes, the listing agent re-sells the home for a profit. Unit Quizzes and the minimum required study time must be met to unlock Final

Fraud perpetrators don't wear signs, but they do sometimes carry red flags. On the surface, fraudsters do not act or appear criminal. They are most frequently nice and clean-cut, and seem kind, helpful, patient, and trustworthy. Their "companies" appear to be well-established and reputable. Some companies may seem to be related to the government, even using government sounding names. Fraud perpetrators may be appraisers, accountants, attorneys, bank officers, landlords, tenants, friends, and colleagues. Because agents are often named in cases of mortgage fraud (whether they are innocent or not) it is important to know what to look for, and steer clear if you suspect mortgage fraud is being perpetrated. Following are some types of red flags that could signal mortgage fraud.

Lesson 2: Short Sale Timelines There's nothing short about a short sale. When you're representing either a buyer or a seller in a short sale transaction, one of the most important messages you can convey is, "This will not be quick." When it comes to short sales, patience is not only a virtue, it is a necessity. It's also important to let a buyer know that just because an offer is accepted by the seller doesn't mean it will be approved by the lender. By setting expectations from the beginning that it will be a long, drawn out process, you can avoid many unpleasant conversations in the future, such as: "What's taking so long ...?" and "Why didn't you tell me ...?" A forewarned client is a prepared client—one that just possibly will not hate you by the time the transaction finally closes. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

A foreclosure is the most common alternative to a short sale. As of January 10, 2014, new rules restrict what is known as "dual tracking," where a lender simultaneously evaluates a borrower for a loan modification or other alternatives while at the same time pursuing a foreclosure on the property. Mortgage servicers cannot start a foreclosure until 120 days (or 4 months) after a borrower falls delinquent to provide time for the borrower to submit a loss mitigation application. If the borrower does not submit an application, the foreclosure process can begin. (Mortgage servicers are allowed to send certain early delinquency notices required under state law that may provide information related to counseling, legal help, or other resources during the first 120 days a borrower is delinquent.) To learn more about how foreclosure works in your state, visit Summary of State Foreclosure Laws. Also, just because a lender approves a short sale (which the lender does in a Short Sale Approval Letter), it does not mean that the home will sell. A foreclosure may eventually be necessary regardless of whether the approval comes.

So, how long do short sales take? Like so many other things in real estate, it depends. A couple of years ago, short sales would consistently take about six months or longer to close. This number is dropping significantly, and varies widely depending on the lender, the local housing market, and the state. Some states, such as Nevada, have implemented legislation with strict turn-around times for lenders evaluating short sales. States whose home values were hit particularly hard have been processing multitudes of short sales, resulting in highly trained agents, motivated lenders, and more efficient processes to make the transactions progress more quickly and smoothly. However, these states also have more short sales in process at any given time, simultaneously clogging up the system. Today, with traditional sales closing in 45 - 60 days, short sales generally take at least twice that long. It's a difficult number to capture broadly. To find a more precise estimate to supply your clients, investigate local home sale data and MLS data to prepare your clients that the process can take months rather than weeks. The O&E Report contains specific information. Items reported in the O&E report include: how the deed is vested for the current owner (which provides ownership information and a legal description of the property) voluntary liens (mortgages or deeds of trust) involuntary liens (tax liens, mechanic liens, etc.) pending civil matters in which the current owner is involved civil judgments against the owner real estate and related tax payment information. By gathering this information, it won't completely eliminate surprise title issues, but it will give you a good idea of the ownership and encumbrances on the property. O&E reports are available through most title companies. More importantly, it will help you identify which lenders or other creditors will need to approve any short sale request. Unit Quizzes and the minimum required study time must be m

A lender can only foreclose on a property that is in default. Most lenders will not consider a short sale unless the owner is already in default, or it can be proven that the owner will soon be in default. Default is when a homeowner falls behind on the mortgage payment. While most of us have been late with a mortgage payment at one point or another, this is not considered "default" in the context of a foreclosure process. Generally the homeowner will not hear from the lender unless the homeowner is at least 120 days behind in payments. Mortgage servicers are allowed to send certain early delinquency notices required under state law that may provide information related to counseling, legal help, or other resources during the first 120 days a borrower is delinquent. At this point, the lender serves the homeowner with a Notice of Default. When you are speaking with clients or customers who have fallen behind in their mortgage payments, it is important to advise them to speak with a real estate attorney or HUD-approved counselor as soon as possible. Falling behind on mortgage payments does nothing more than blemish a person's credit report due to the late payment. Falling behind does not need to mean foreclosure; the homeowner can still bring the loan current by making a payment.

Distressed sellers are like wounded fish; they tend to bring out the sharks. Because they are in danger of losing their house, distressed sellers may experience feelings of panic and desperation, and thus are ripe for the picking. Some common scams run on sellers include the following: Sell short, rent back. A con artist will approach the seller, and convince the seller to stop making mortgage payments and save the money he/she would put toward the mortgage, so the property can be sold as a short sale to the con artist. The con artist then buys the home and rents it back to the homeowner, agreeing to sell the home back after a period of time (such as a year, for example). Frequently what will happen is that the con artist will collect the rent (and the advance "fee" to start with), then stop making payments. The house then goes into foreclosure, and the former owner is evicted. Foreclosure rescue schemes often charge up-front fees, convince the homeowner to deed the property to the fraudster, with the promise that the homeowner can rent or buy back the property after their financial situation is improved. The fraudster does not make the promised payments to the lender, and the property is eventually foreclosed on. Debt elimination schemes offer to eliminate a borrower's debt for an upfront fee. The schemers use false "loan" documents, and have the borrower make payments directly to their company. The original lender is never paid, and the house goes into foreclosure. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Adjustable rate mortgages and stated-income, no-documentation loans contributed to the number of distressed properties on the market. Adjustable rate mortgages, which allow a homeowner to get into a home with an artificially low interest rate and lower payments, can help buyers afford a more expensive home than might be possible otherwise. However, when the home then declines in value while the mortgage payment rises (due to the interest rate adjustment), this can make the payments impossible for the homeowner to make, and provides very little upside for making them. Refinancing to a lower rate is not an option, either, because the home has declined in value. Ouch. There was a time when mortgage brokers and other lenders routinely processed "stated income, no-documentation loans." This meant a borrower with a solid credit rating could borrow nearly any amount, and the lender would not verify the borrower's financial ability to repay. Lenders knew housing prices were on the rise, and tended to "look the other way" when these questionable loans were made because there was little danger of losing money, even if the borrower defaulted. Then came the housing decline. These types of loans were no longer available, which meant fewer buyers were on the market, driving prices down. A borrower who got in with a stated income, no-documentation loan couldn't even take advantage of the falling interest rates that happened after the housing bubble burst, because they couldn't qualify for the home they were already living in! Buyer defaults were the natural outcome of this house of cards. Buyer defaults glutted the market with depreciating housing, further driving prices down. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Borrowing funds may also be an option. While borrowing funds from family may feel awkward, if a homeowner has this option available, it is far better than losing the home. Most family members may be willing to help out rather than see their relative, children, or grandchildren homeless! If relatives aren't an option, borrowing against retirement funds is. While there is a penalty for early withdrawal, a person sitting on a large retirement nest egg can find that a "float" of $20,000 or so may be enough to help them over a financial hump, avoid bankruptcy, or foreclosure, and remain in their home.

Advise your clients to seek expert advice. When you are speaking with distressed sellers who may be contemplating a short sale, renting out their home, or other options for distressed sellers, it is important that you do not attempt to advise them on matters that are beyond your area of expertise or that fall outside your licensing scope. Due to the tax implications and legal issues surrounding default, renting a home, short sales, and foreclosure, you should advise your client to consult with a housing counselor, tax advisor, and/or attorney before making a decision. HUD provides a list of approved housing counselors by state.

Be prepared for anything, and be very responsive. If you hear back from the lender asking for anything, be prepared to deliver it. When a lender is working with you, the lender is not working with the dozens of other short sales waiting for approval. If you don't act quickly, you will be the one waiting while the lender works with someone else. Get used to waiting, and to performing quickly when it's your time at bat. The lender is in charge here, and sets the time and the pace.

After an offer reaches the lender, it is entered into the lender's system. There's not much that's certain about a short sale approval, but one thing that is certain: the lender has a system, and it must be followed to a "T." It is likely, after receiving the request for a short sale, that the lender will need more information from you, or will need to enter the offer into an online system. These systems are designed to streamline the short sale approval process, so be grateful for them! The lender will assign a short sale negotiator to your "case," and this is the person you will work with throughout the short sale approval process, so it's best to develop a good working relationship with them. This negotiator is not only working with you, but with probably another several dozen agents and their clients. In this case, it is not necessarily true that "the squeaky wheel gets greased." You should keep in contact, but not make a pest of yourself. Often in this case the overly squeaky wheel gets sent to the bottom of the pile. Plan on touching base weekly if you've not heard back, or more often if there is a change in circumstances, or if the negotiator contacts you for information. In any case, a good working relationship will smooth out the rough spots in the short sale approval process.

Size and location are also critical factors in the CMA. When preparing the CMA, having accurate figures for the size, and a thorough knowledge of area and neighborhood dynamics is essential. As you know, part of creating a CMA is in understanding the subject home; the other part is in understanding the specific market it is in. Both of these will guide you in selecting appropriate comparables. For instance, if the subject home is in an expensive neighborhood, but there are definite higher value homes in specific areas of that neighborhood, this is good information to have. Let's say one quadrant of the neighborhood is across a busy street, or closer to the freeway (and noise); these would make comparing two similar homes in the same neighborhood (but in different quadrants) unfair unless this differential is factored in. Remember that the lender will likely not even know the neighborhood, let alone its idiosyncrasies, so proof of any differential will be necessary. It may be necessary to include maps to show where the home is located in the neighborhood, and the proximity to schools, busy streets, etc. Make certain that you have a true figure for lot size and home size. Don't rely strictly on tax records, especially if there is a discrepancy. And before you use a "price per square foot" figure in your CMA, make certain you are comparing apples to apples, such as: Above-ground square feet vs. below-ground square feet Finished basement vs. unfinished basement Upgraded vs. outdated. Attic space may or may not be livable. When possible, especially when there is a question of usable space, try to visit comparables you are using.

Age (and market age) also matter. Age is a factor in home pricing, and it can work either way. In an historic neighborhood, for instance, certain eras (1930s and 1940s) may actually be more popular with buyers (and thus have higher market values) than more modern homes (1970s and 1980s). Style of the home (ranch vs. Tudor vs. mid-Century modern) can also make a difference in how much a home will fetch on the open market. Current market conditions, especially typical time on market stats, must figure prominently in the CMA. If comparable homes in the area are selling in an average of 140 days, but homes in this neighborhood sell in 30 days, you have a hot property and can price accordingly. The reverse is true as well: if the neighborhood is a slow mover, the home will likely not fetch as high of a price as faster moving areas.

KEY POINTS from Unit 2: An O&E (preliminary title report) should be obtained early in the short sale process to determine ownership and encumbrances. In a short sale, the seller must accept and the lender must approve the offer. With a short sale, the listing agent will prepare the CMA with the lender in mind. Try to secure your seller's cooperation in the short sale process early on. Short sale packets should be thorough and in the form the lender wants. The seller's hardship letter should concisely demonstrate the seller's financial plight, and how the seller came to be in the current situation. Short sales must be at arm's length; there can be no undisclosed relationships between any parties to the transaction. When dealing with the lender's short sale lender it is important to be polite, professional and prompt. After approval is met on a short sale, the parties should do their utmost to meet all terms, including the closing date; failure to do so could cause the lender to retract its approval. Lenders will frequently start foreclosure proceedings even while the short sale request is being evaluated. Even when the lender approves the short sale, it doesn't mean the seller won't have to make up the deficiency in the debt repaid. When a lender forgives a short sale seller's debt, the lender will file a 1099-C, which is a Cancellation of Debt. This could mean the debt will become taxable; sellers should be advised to check with their accountant. There are two main categories of short sales: approved, and third party required, each with different timelines. When evaluating an offer on a short sale, the lender will look most strongly at the buyer's ability to close. Two types of mortgage fraud are property fraud and fraud for profit. Flopping is a means of artificially lowering the perceived value of a property to purchase it and make a quick profit; it is a form of mortgage fraud. Any transactional funds should appear on the Closing Disclosure; if they do not, it could be mortgage fraud.

B. require the sellers to pay back the deficit This is the correct answer

. After a short sale, the seller may receive $3,000 in relocation assistance. This is the correct answer

Bernadette, Congratulations! You successfully passed your quiz. Click below to return to the Table of Contents and continue your course. 1. Which of the following is a benefit of Home Affordable Foreclosure Alternatives (HAFA)? A. Lenders guarantee to finance the sellers next home purchase. B. Homeowners can modify their loans to be able to afford their mortgages. C. After a short sale, the seller may receive $3,000 in relocation assistance. This is the correct answer D. Homeowners can refinance based on the new decreased value of the home. This was your answer, which is incorrect. Feedback: The HAFA short sale differs from a traditional short sale in that the participating lender guarantees to waive the deficiency amount. The lender also works with the seller to determine an acceptable sales price. HAFA short sales may be less damaging to the seller`s credit than a traditional short sale, and HAFA may provide the seller with up to $3,000 in relocation assistance. 2. If the homeowner`s mortgage is underwater but the homeowner has good credit and significant savings, which of the following may be the best option? A. Allow the house to go into foreclosure and use the savings for a down payment on a new home. B. Purchase a second home, then file bankruptcy to get rid of the first one. C. Sell the home at a loss and use the savings to pay back the difference to the lender. Congratulations, this is the correct answer! D. Short sell the home to a family member and then rent it back from them. 3. Why would a lender forgive a homeowner`s deficiency debt as part of the short sale agreement? A. Pursuing the debt is costly, and unlikely to pay off. Congratulations, this is the correct answer! B. The lenders would have to pursue the debt from the new buyers, and it`s not their fault. C. The real estate professional offered the lender a kickback for the favor. D. The short sale seller offered the lender a kickback for the favor. 4. When a borrower applies for a fixed rate mortgage, what is the standard benchmark credit score generally required? A. 380 B. 590 C. 620 Congratulations, this is the correct answer! D. 780 5. Which is the possible outcome for a seller whose short sale is approved? A. The seller will owe taxes on the amount forgiven. Congratulations, this is the correct answer! B. The seller will walk away with $5,000 in proceeds. C. The seller will walk away with $3,500 in proceeds. D. The seller`s credit rating will improve now that there is no longer a mortgage. 6. What document should a seller obtain when choosing a deed-in-lieu-of foreclosure option? A. A deed-in-lieu-of addendum B. A waiver of the deficiency judgment Congratulations, this is the correct answer! C. A cancelled deed D. An insurance binder 7. Compared to the timeline of a traditional home purchase, short sales usually take _______. A. half the time B. weeks or months longer Congratulations, this is the correct answer! C. at least a year D. less than two weeks 8. Which of the following is NOT a likely consequence of a seller who obtains a short sale? A. Debt B. A tax bill C. Poor credit rating D. Increased savings Congratulations, this is the correct answer! 9. Barbara`s clients tell her that a loan modification specialist has offered to help them reduce their mortgage rate for a $4,000 advance fee. What should Barbara do? A. Ask for the name so she can refer the specialist to her other clients. B. See if she can get a listing anyway. C. Tell her clients that they should not pay an advance fee for this service. Congratulations, this is the correct answer! D. Tell her clients the fee is exorbitant, and to see if the specialist will reduce it. 10. What is a deed-in-lieu of foreclosure? A. The lender approves a short sale and waives the deficiency amount. B. The homeowner transfers the deed and property rights to the lender and is released from the mortgage. Congratulations, this is the correct answer! C. The buyer purchases the deed, but the seller retains the property rights. D. The buyer purchases the property rights, but the seller retains the title. 11. Karen and Juan purchased a home, which is now worth less than what they owe on it. When Juan was laid off, Karen found a full-time job, and Juan found part-time work, so they are earning about the same amount as when they purchased the home. Is a lender likely to approve a short sale in this scenario? A. Yes, because Juan lost his job. B. Yes, because the home is worth less than what they own. C. No, because they can still make the mortgage payments. Congratulations, this is the correct answer! D. No, because short sales only apply when the home is already in foreclosure. 12. Which of the following is an appropriate question to ask your short sale seller client? A. "Why would you consider a short sales, when they are as bad to credit as a bankruptcy, and bankruptcy offers a clean break?" B. "How many mortgages are on the property, and how much are they?" Congratulations, this is the correct answer! C. "Why don`t you just answer `not sure` for the entire property disclosure form, since you won`t make a profit from the sale anyway?" D. "Didn`t you plan for job loss before you bought the house?" 13. Why is traditional refinancing rarely an option for sellers considering a short sale? A. The home is already in foreclosure. B. They already owe more than the home is worth. Congratulations, this is the correct answer! C. They no longer qualify for capital gains tax benefits. D. Lenders now see the sellers as unreliable. 14. When a homeowner receives a Notice of Default, what should they do first? A. List the home for sale as a short sale B. Seek short sale pre-approval from the lender C. Begin bankruptcy proceedings D. Contact a HUD-approved financial counselor Congratulations, this is the correct answer! 15. Junior lien holders are particularly reluctant to approve a short sale because _________. A. sellers typically pay off junior lien holders first B. primary lenders are paid first, and there is usually nothing left of junior lien holders Congratulations, this is the correct answer! C. foreclosures are more profitable and easier to execute D. they do not understand that the housing market has changed

One alternative to a short sale is a loan modification. There are many options a homeowner should consider before selling short. A loan modification is one of the best options, because it allows the homeowner to stay in the home with mortgage payments that are more affordable. A loan modification permanently alters the terms of the loan so that the monthly mortgage payment is more affordable for the homeowner. VIRTUAL FIELD TRIP: The Department of Housing and Urban Development h

Beware of loan modification scam artists; only refer to licensed loan originators. As a licensee, you should be aware, and make sure that your clients are aware, that there are unscrupulous individuals and entities preying on distressed homeowners. Many of these scam artists promise to work with the lender on the seller's behalf, to obtain a loan modification for a fee. Unfortunately, this often results in equity theft, a loss of crucial time, and eventually foreclosure. Turning the matter over to an attorney is not a guarantee against fraud, however. In a national database of 25,000 homeowner complaints regarding suspected mortgage-related frauds (complaints collected since 2010) more than a quarter related to improper or illegal activities by lawyers or law firms! If you refer a homeowner to a loan modification "specialist," be absolutely certain that the person holds a loan origination license. The license will provide some protection because of the regulatory oversight of licensed individuals.

Bernadette, Congratulations! You successfully passed your quiz. Click below to return to the Table of Contents and continue your course. 1. Amay is up-to-date on her mortgage payments, even though her home is underwater and she lost her job. Her savings are running out, and she wants to short sell. When can her lender start foreclosure proceedings? A. When she loses her job B. When she requests short sale approval C. When she substantiates financial hardship D. When she falls behind in her mortgage payments Congratulations, this is the correct answer! 2. When is bankruptcy a better alternative to a short sale? A. Never B. Sometimes Congratulations, this is the correct answer! C. Always D. Only when the seller hasn`t had a bankruptcy in the last two years. 3. Why are lenders willing to work with short sales? A. They are generally more profitable than foreclosures. This is the correct answer B. They want to help the sellers who are in over their heads. This was your answer, which is incorrect. C. They want to help the buyers get the home for a good price. D. They do not know what the house is really worth. Feedback: While a lender may prefer to receive all of their funds, many lenders are willing to consider a short sale in lieu of the cost and delay of a foreclosure. Usually short sales will net the lender more than would be received in a foreclosure, but not always. Lenders may also be willing to forgive the homeowner`s debt rather than pursue a judgment, because a court pursuit is costly, it takes time and resources, and the payoff may be slow in coming, if it ever does.� 4. Which of the following is a legitimate option for homeowners to stay in their homes even though they can`t afford it? A. Find a buyer and set up a contract for deed. B. Short sell to a family member, who then rents the home back to them. C. Borrow money from a retirement account until finances improve. Congratulations, this is the correct answer! D. Find an investor to pay their mortgage for a few months in exchange for an up-front fee. 5. What is the name of the document the lender uses to communicate approval of the short sale? A. The seller`s hardship letter B. The lender`s forgiveness letter C. The lien letter D. The short sale approval letter Congratulations, this is the correct answer! 6. "Stated income, no documentation" loans are _________. A. still used widely today B. used only on FHA loans today C. no longer available Congratulations, this is the correct answer! D. available only to veterans 7. Why would a lender forgive a homeowner`s deficiency debt as part of the short sale agreement? A. Pursuing the debt is costly, and unlikely to pay off. Congratulations, this is the correct answer! B. The lenders would have to pursue the debt from the new buyers, and it`s not their fault. C. The real estate professional offered the lender a kickback for the favor. D. The short sale seller offered the lender a kickback for the favor. 8. What document should a seller obtain when choosing a deed-in-lieu-of foreclosure option? A. A deed-in-lieu-of addendum B. A waiver of the deficiency judgment Congratulations, this is the correct answer! C. A cancelled deed D. An insurance binder 9. When working with a seller contemplating a short sale, which of the following statements would be acceptable from a real estate professional? A. "How did you let yourself get so far in debt?" B. "Have you explored other alternatives to a short sale?" Congratulations, this is the correct answer! C. "The lender will be more willing to work with us if you fall behind in your payments." D. "Why did you buy a house that you couldn`t afford?" 10. Stu sold his home via a short sale last year. He has since found a new job, and saved enough for a 10% down payment on a new home. According to Fannie Mae`s underwriting guidelines, even if Stu`s credit score and down payment are sufficient, the underwriters should still wait at least _______ following the short sale before approving this loan. A. one year This was your answer, which is incorrect. B. four years This is the correct answer C. seven years D. ten years Feedback: With a 90% LTV ratio and 10% down, the Fannie Mae guidelines would recommend waiting at least four years before approving this loan. 11. When a borrower applies for a fixed rate mortgage, what is the standard benchmark credit score generally required? A. 380 B. 590 C. 620 Congratulations, this is the correct answer! D. 780 12. Which of the following is a benefit of the Home Affordable Refinance Program (HARP)? A. Lenders guarantee to waive the deficiency amount after a short sale. B. Homeowners can modify their loans to be able to afford their mortgages. C. After a short sale, the seller may receive $3,000 in relocation assistance. D. Homeowners can refinance for up to 125% of the value of the home. Congratulations, this is the correct answer! 13. In a short sale situation, the home is worth _________. A. less than the appraisal states B. more than the appraisal states C. less than the amount owed on it Congratulations, this is the correct answer! D. more than the amount owed on it 14. Why is traditional refinancing rarely an option for sellers considering a short sale? A. The home is already in foreclosure. B. They already owe more than the home is worth. Congratulations, this is the correct answer! C. They no longer qualify for capital gains tax benefits. D. Lenders now see the sellers as unreliable. 15. Which of the following seriously damage someone`s FICO score? A. Applying for extra credit cards B. Serious delinquency Congratulations, this is the correct answer! C. Listing a home as a short sale D. Consulting with a housing counselor

Candace represented the Kaufmans, who were selling short. In their initial interview, the Kaufmans told Candace that they had a first mortgage of $150,000 and a second of $28,000. Candace ordered a preliminary title report (O&E), and it arrived later that week. To Candace's surprise, there were four (not two) liens on this property. The first lien (for $150,000), a second institutional lien for $28,000; a third lien by a private person, and an abstract of judgment. In most short sales, the first lien holder will only offer money to other institutional lien holders. Because of this, a short sale of with four lien holders (two of which were non-institutional) would require some heavy duty negotiating and probably some cash. The moral of this case study is this: when listing a short sale, it is vital to order and study the O&E at the very beginning of the transaction. Sometimes sellers forget information, and sometimes they "misremember the truth." The O&E report tells all.

Bringing money to the table can help a seller avoid a credit hit. If a seller has enough cash available, and wants to protect a stellar credit rating but must sell short, it is possible to sell short without involving the lender. To do this, the seller would have to make up the shortfall at closing from available funds. Usually, sellers contemplating a short sale do not have extra funds lying around, but sometimes the seller simply wants to get out from under a mortgage and knows the home will not sell at the price that is owed. Dipping into savings to be able to get on with other plans, especially when income is on the rise and the monetary loss is just a temporary setback is a viable option for some, and one that you should at least mention when meeting with a client who is contemplating a short sale. If lenders require sellers to make up the difference in cash, the lender may very well ask the seller to dip into their retirement savings, such as a 401(k).

Chapter 2: The Distressed Property Process Lesson 1: Seller Hardships Short sales are not for everyone. Not everyone will qualify for a short sale. Any lender who is willing to take less than is owed is going to ask some tough questions of the seller. In fact, there is a whole short sale package that will need to be submitted, but we'll discuss that in a moment. For now, let's look at some of the qualifying factors for short sale sellers. Qualifying factor #1: The home must have decreased in market value. This one is a no-brainer because if the home had increased in market value, the seller could simply sell it on the open market, pay off the loan, and take any profit. To prove that a home has decreased in value may require listing it and marketing it at a given price for a period of time. The fact that it hasn't sold is an indicator. However, lenders will also want a broker's price opinion, or may require an appraisal before determining a home's true loss in market value. Qualifying factor #2: The loan is in default, or will be soon. Lenders who are getting paid aren't anxious to stop the gravy train! If a homeowner is able to make their payments, a lender will want to know why a short sale should be considered. The homeowner will need to prove that default is imminent. This can be done through a seller's hardship letter that details their circumstances.

The home inspection and the appraisal are closing hurdles that must be overcome. Even in a typical transaction, buyers often get cold feet after a home inspection. This is also true with short sales, and often more so. The buyer is buying the short sale, most likely, because it is believed to be a good deal. After all the repair costs are added up, however (repairs the seller can't pay for and the lender won't pay for), the buyer may see the short sale as less of a bargain, and decide to pull out. Or, the buyer's lender will require repairs that the seller's lender is unwilling to make. Buyer pull-out after inspection is all too common; therefore, if backup offers are available, they should be in place prior to the home inspection. The appraisal can cut both ways. If the home appraisal comes in low, the buyer will want to renegotiate the price. If the homppraisal comes in high, the lender may balk at the current offer, and shelve the transaction.

Delays in closing may eliminate buyers' financing options. The typical closing for a short sale is 60-90 days or longer. Buyers may be locked into a certain rate, or be counting on a certain financial program that, by the time the bank gets around to approving the loan and all parties set a closing date, is no longer available, pricing the buyers right out of the market. Frequently these issues can be worked out with the lender, but there are situations where: The transaction fails to close because the bank increases its down payment requirement, and the buyer was approved many months back for a lesser amount, and cannot meet the new requirement, or The buyer has suffered a change in income or credit history during the time the approval and transaction were pending, making the borrower ineligible for the loan by the time the transaction is ready to close.

hort Sale Mortgage Fraud The U.S. Department of Justice recognizes two forms of mortgage fraud. Any time there are distressed sellers, or an opportunity to make money on a grand scale (such as the huge distressed property market) there will be unscrupulous individuals who try to take advantage of the situation. Mortgage loan fraud is perpetrated by individuals and institutions. The two types of mortgage loan fraud recognized by the Department of Justice (DOJ) are: Fraud for property Fraud for profit. We'll discuss both of these, what to look for, and how to prevent becoming involved as an agent in an unscrupulous or illega

Fraud for property usually involves individuals. The most typical form of fraud for property is misrepresentation by the buyer when applying for a loan for a primary residence; it usually involves a single loan. Fraud for property can work any number of ways. These include: Falsification of or misrepresentations in paperwork, such W-2s, Social Security numbers, and tax returns. Misrepresentations in gift letters (the money was actually given by the seller, the buyer's agent, etc., but the letter is written as if it was from a family member). Misrepresentations concerning an intent to occupy (some government deals are meant for owner-occupied only, and when investors falsely claim to be owner-occupied, this is fraud). Misrepresentations as to source and use of funds.

his is an emotional time; it is important to be sensitive. The loss of one's home, even if it is self-directed as short sales are, requires sensitive handling. Emotions run high; there is often shame, guilt, and feelings of hopelessness. Short sales affect every family member involved. The cold reality is that a short sale owner will be leaving their home and that brings with it unknowns, as well as fear and emotional angst. No one likes not knowing where they are going to live. Moving is especially hard on families with children. Where will they go? Will the kids have to change schools? When working with a short sale seller who is emotionally struggling, it is important to remind him/her that a home does not make a family; a family makes a home. Try to help your client focus on the opportunity to make a fresh start, rather than what is being left behind. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Hardship is in the eye of the beholder—and the lender is the beholder. Lenders get a bit cranky when they don't get their money back. After all, they have a Board of Directors and a whole slew of shareholders who will hold them responsible for their financial decisions. So before a lender will consider a loan modification, short sale, or any other remedy proposed by a seller that does not involve full and immediate repayment of their loan, the seller will need to prove that the current hardship situation is not self-imposed. Reasons a lender will not accept as a bona fide hardship condition include: Making a bad purchase decision. Buying at the top of the market and seeing one's home depreciate is not likely to carry much weight with a lender when evaluating a seller's hardship condition. Changed his/her mind about a neighborhood. A homeowner who grows dissatisfied with the neighborhood carries no weight with a lender contemplating a short sale or other alternative to repaying the loan. This is true even if the house next door has become a haven for a biker gang, for example. Purchasing another home. No lender will accept this as a bona fide hardship. Moving into an apartment. Again, this is a lifestyle decision, and will not be considered a valid reason for reneging on a loan. He/she wants out from under the mortgage. Who doesn't? But unless hardship can be proved, simply wanting to escape a looming mortgage debt will gain no sympathy from a lender who would then have to take a loss. Pregnancy. A lender will not accept this as a hardship because pregnancy is a personal decision. (Sorry; the lender probably won't even send a baby shower gift.)

There's good news and bad news. Some states who were especially hard hit (i.e., Nevada) have added new regulations that prohibit lenders from pursuing the deficient amount if they agree to a short sale. Other states (i.e., Minnesota) limit when and under what circumstances lenders may obtain deficiency judgments after foreclosures. It is possible to receive a deficiency judgment from a second or junior lien on the foreclosed property. If your clients have a junior mortgage including a home equity line of credit or home equity loan, their junior lien holder could choose to sue and seek a deficiency judgment for the amount due under the junior lien. Let's say the Schumacher family bought a house and the mortgage amount total in default was $300,000 from two different lenders—$250,000 from ABC Bank, and $50,000 from XYZ Equity. ABC Bank is their first mortgage lender and XYZ Equity is their junior lien holder. When the property is foreclosed by advertisement by ABC, there is no judgment. However, since XYZ is the junior lien holder of the property, XYZ could choose to sue and seek a legal judgment for the amount due, which could be more or less than $50,000. In many cases, homeowners originally take out only one mortgage for the property when it is purchased, but later open a home equity line of credit or obtain a home equity loan. The loan or equity line of credit would become a second lien on the property, subject to a deficiency judgment.

Here is how the junior lien holder sues and seeks a legal judgment. Assume XYZ Equity lost $50,000 and pursues its loss by turning the Schumacher's file over to a collection company or an attorney who would sue them for the loss. If the Schumachers do not pay the balance amount, the collection company would get a judgment against them and place this legal judgment on their credit report. The Schumachers wouldn't be able to obtain financing to buy another house until this judgment amount is paid off full or until they can negotiate with the collection company to short sell this judgment amount. Either way the Schumachers will still have to come up with a large amount of money to deal with the deficiency judgment which can stay on their credit report for up to 10 years. Property taxes will not automatically lower after a distressed property sale. It might be hard to believe, but the government does not go out of its way to reduce a homeowner's property taxes unless asked. If your clients purchase a distressed property for $120,000 but its property taxes were computed on the last sales price of $230,000, your clients should be aware that they will likely have to request a reduction in property taxes. This will not automatically occur.

Determine a fair market value for the property. After you've determined that the owners are in fact the owners of the property, with every right to sell the property, and who the "players" will be in the short sale approval process, you're ready to proceed with pricing the property for the current market. Remember that this is no ordinary transaction. The seller wants out, and the lender wants its money. These separate motivations can work at cross-purposes unless you can come up with a market price that will work for both (it will sell at that price, and the lender will approve the sale). When coming up with a list price for a short sale property, remember who your client is: the seller, not the lender. However, it is in your client's best interest for you to make the lender happy as well. If the lender won't approve the sale, the client won't get their short sale. This is a time when the CMA is critical. Usually when preparing a comparative market analysis (CMA), you're trying to justify your price to the seller, a seller who often thinks their home is worth more than it is. With a traditional transaction, you will often arrive at a price based on current comps, and the seller will balk and tell you why this home is "special" and deserves a higher price. In this case, you don't have that issue. You have a seller who wants a quick sale at any price, and a lender who wants to minimize its loss (which means the lender would prefer a list price as high as the market will bear). There is another factor at work: if the lender believes you're intentionally low-balling the suggested list price to get a quick sale (and commission) or for other personal interests, you could damage the relationship with the lender before you really get started—not the best foot to put forward when you need the lender's cooperation.

In preparing the CMA, you're really preparing it for the lender. Yes, this flies in the face of what we just said about the seller being your client. But the seller may not even glance at the CMA. The lender, on the other hand, will scrutinize it carefully to determine whether the price you have arrived at is in fact the highest price it will sell for in the market. Therefore, you need to make this CMA the most accurate, thorough, and professional CMA you've ever prepared. You must leave nothing out, and leave no room for doubt when describing the: condition of the property size/location of the property age of the home current market conditions comps you selected, and why.When discussing the property condition, it's helpful to get contractor bids. If the property needs repairs or updates to bring it to today's market standards, try to obtain contractor bids. Estimates don't fly well with lenders, but concrete bids will. This will help you not only justify the sales price you've arrived at, but will be a strong signal to the lender of the type of expense that may be required to prepare the property for market should the lender foreclose. While most lenders will sell foreclosed properties as-is, this still gives the lender an idea of how the property will be discounted on the market due to the expense of the repairs and upgrades needed. These repair bids also provide information when comparing the property with comparable properties that do not need repairs, and already have upgrades completed.

Red flag #5: "Loans for a Day" and simultaneous closings. When the purchaser of a short sale intends to immediately sell it, or to do a simultaneous closing, this should raise some serious red flags. Often what is happening is that the listing agent has contacted a friend, told them a "great deal" to be had on a property, and the purchaser or the listing agent has already arranged a subsequent sale for a profit. Why is this illegal? Because the listing agent represents the seller, and it is the listing agent's job to get the highest price possible for the seller. If the listing agent knows of another buyer willing to pay more, then that is the offer that should be presented.

In such a situation, the amount given is negotiated between the two lenders. It might be several hundred, a few thousand, or even several thousand dollars. However, some junior lenders want more. They encourage the sellers, or the buyers, or even their agents to also contribute to the short sales transaction, and they threaten to withhold approval of the short sale unless their demands are met. The way the funds are transferred even sounds fairly innocent. Examples include: Asking the seller to make a payment on the seller's account Asking the buyer to pay the lender a fee after the transaction closes Asking the listing or selling agents to pay the lender directly from their commissions. However, if the primary lender knew of the fund transfer, it would definitely want a piece of the action. If a monetary transaction is being hidden from the primary lender, it is mortgage fraud. All monies paid in a transaction are required to be reflected on the Closing Disclosure.

Lenders, faced with a loss, will often take the loss rather than pursue the seller. The old saying, "You can't get blood out of a turnip," has resurfaced in the wake of the distressed property market. While a lender may prefer to receive all of their funds, many lenders are willing to consider a short sale in lieu of the cost and delay of a foreclosure. Usually short sales will net the lender more than would be received in a foreclosure, but not always. Lenders may also be willing to forgive the homeowner's debt rather than pursue a judgment, because a court pursuit is costly, it takes time and resources, and the payoff may be slow in coming, if it ever does.

Junior lienholders are often reluctant to approve short sales. Junior lienholders especially loathe approving short sales because in a short sale situation, the primary lender is paid first, and then if there is anything left, the junior lienholder is paid. Usually there is little to nothing left for the junior lienholder. Consider this situation: The homeowner owes $167,000 for a home. It can be sold for $143,000 in the current market conditions. The primary lender is owed $150,000. After closing costs (including commissions) are factored in, the primary lender may only recoup $135,000 of its $150,000 investment. And what's left for the junior lienholder? Nothing. Sometimes junior lienholders prefer to take their chances with a foreclosure.

ecure seller cooperation from the beginning. As mentioned earlier, short sale sellers have different motivations than a typical seller. The sellers are basically giving up on their home and turning it over to a stranger. It's not where they want to be. While a non-short sale seller might go to great lengths to get a home ready for showings, and be very accommodating about scheduling showings, short sale sellers tend to act as though they've had the wind knocked out of their "sales." They are not motivated to spruce up a home they are losing. They don't want "vultures" tromping through their house, taking advantage of their circumstances. It's important that you have a heart-to-heart with your clients early in the process, before even posting the listing, reminding the sellers of the end goal: to sell the house quickly and relieve their financial worries. Enlist their cooperation for preparing the house for showings and open houses, and get their assurance that they will accommodate prospective buyers who want to see the home. Yes, it's a tough situation for the sellers to be in, but that's all the more reason why they should cooperate: so they can get it sold, get it over with, and get on with their lives. And remind your clients that there is always a possibility that the lender will require them to pay the lender back for any shortfall. If so, they will want to get the best price that can be obtained, and that will require their full cooperation.

Lesson 2: Negotiating the Purchase Agreement, and the Approval You did a great job marketing the short sale, and a buyer wants to buy—now what? When the first offer is received, it is important that you and your clients review it together. Is it a full-price offer? More? Great! If it's less than full price, and it is the first offer received, you still may want to present it to the bank. This will give you an indication of what price the bank will be willing to accept. It will also let the bank know that: You are marketing the property. This is the best price you've received so far. In any case, this is a good time to remind the seller that just because the seller accepts the offer doesn't mean the lender will approve the short sale. But it's great that you have an offer, because often a lender won't even consider a short sale approval until a bona fide offer is presented.

Short sales affect FICO scores, and short sales are a "Catch 22." In terms of FICO scores, there are three credit events that will severely damage a person's FICO score, giving them the ominous label of "Score Factor Code 22," and they all carry exactly the same weight. They are: Serious delinquency Derogatory public record Collection filed. A homeowner in default (remember that this means the homeowner is 120 days or more behind on mortgage payments) is technically "in collection" (see item #3 above). To protect their credit rating, homeowners should avoid going into default. However, default is sometimes necessary to prove hardship to a lender, and lenders may not be willing to approve a short sale if the homeowner cannot prove hardship. Therefore, if a homeowner is determined to a do a short sale, it should be made clear that this will involve a serious credit hit.

MA sees short sales as a "derogatory credit event." In the Fannie Mae booklet, Sales Guide (for lenders), a short sale is described as one of several "derogatory credit events:" The presence of significant derogatory credit events dramatically increases the likelihood of a future default and represents a significantly higher level of default risk. Examples of significant derogatory credit events include bankruptcies, foreclosures, deeds-in-lieu of foreclosure, pre-foreclosure sales, and short sales. FNMA, in its Selling Guide, recommends that underwriters require the following "seasoning" period for people with such significant derogatory credit events as a pre-foreclosure, short sale or bankruptcy. Waiting Period Additional Requirements Two years 80% maximum LTV ratios Four years 90% maximum LTV ratios Seven years LTV ratios per the Eligibility Ma

ake sure buyers know about the foreclosure "Dirty Dozen." In your initial meeting with your clients, make certain they understand the Dirty Dozen about foreclosed on properties. Just because it's a foreclosure doesn't mean it's a bargain. Lenders want to get as much money as possible for their REOs, and will therefore price as high as the market will bear. Most foreclosures need repairs. Former homeowners often let their homes fall into disrepair; some even do damage as some retaliation against their lender for foreclosing. That first visit may be ugly. Although most banks prepare homes for resale, the glut of foreclosures in some areas has caused a backlog of maintenance issues. Trash may be left behind, there may be stained carpets and walls, animal smells, etc. In a bidding situation, an inspection may not be possible until after the offer is accepted. Many foreclosures are unavailable for viewing during the bidding process. Until an offer has been accepted, the buyer is going on a drive-by and any interior photos available (there may be none). No appraisal, no inspection until after there is a winning bidder. The lender will not do repairs. Lenders are already taking a loss when they take back a property. If the property had equity in it, the former owners would have sold it rather than allow it to be foreclosed on. Therefore the owners were likely upside down, meaning the lender is not getting back what it paid out in loan funds. On top of that, foreclosures are costly and the lender won't want to add repairs to the list of financial hits it has already taken. Appliances may be missing. It's not uncommon for the owners to grab anything of value: appliances, copper wiring from the walls (!), doors, light fixtures, on their way out the door. The buyers will need to figure in the cost of new appliances when crunching numbers on a foreclosure "bargain." Sometimes these acts are not committed by the homeowners, but vandals who break in to empty houses, looking for valuables. Lenders may also be the culprit! To prevent theft and break-ins, frequently lenders will have appliances removed. Financing can be an issue. In a typical foreclosure auction, the highest bidder must pay in full within 24 to 48 hours of winning, and payment must be made by cash, check or money order. If your clients plan to finance a foreclosure, they will need to secure a loan prior to bidding. This can be exceedingly difficult, because they will have to estimate how much they will need to bid to buy the property, which will not be known until the auction concludes. The client and their lender will likely have to agree on a maximum limit, and the lender would have to agree to lend up to that amount. If the bid exceeds that limit, the buyers will either need to pay the difference in cash or lose the property. One solution is to ask the bank selling the property if it will finance it. Often favorable rates or terms will be offered to effect a quick sale.

Make sure buyers know about the foreclosure "Dirty Dozen" (continued). 8. Mold can be an issue. Often foreclosed on homes have been vacant for months, even a year or more. Without air circulation, the indoor air quality can deteriorate rapidly. Any moisture can breed mold, especially in humid areas, but even in arid locations such as Arizona. Sometimes the mold is hidden behind a wall, or has just begun. Once mold takes hold on drywall, there's usually no hold to save it. The new buyer will have to replace any mold-infested drywall. 9. Holdover happens. Sometimes, the previous homeowner refuses to leave the property, even after someone else buys the home. Rarely does the lender forcefully evict the previous homeowner prior to sale, and after the property is sold, it becomes the new homeowners' responsibility. This means that the new buyers could have to evict the previous homeowners before they can move into their own house, and it can take months to do so successfully. 10. Buyers may have no flexibility about when to renovate. If their new foreclosed home is in bad condition, your clients should be prepared to start renovation immediately. If local authorities perform nuisance abatement duties—such as trash removal or boarding up broken windows—the new property owner will be billed for the costs, and a lien may be placed against the property. And forget about a quick resale; lenders typically require buyers to remain in possession of the property for at least 90 days after closing. 11. Bats, bees and boars, oh, my! Wild animals, including boars and panthers have been found in abandoned homes. High grass is a haven for snakes; rotted food attracts rats. Bats make home in attics, bees bore into walls. Skunks have been found in ventilations systems. Carpenter ants and termites, attracted by wood piles left near a house, can cause extreme damage. 12. Many foreclosures have title issues. Even when a bank wins a foreclosure lawsuit, if the lender failed to dot all its "i's" and cross all its "t's," or if the lender failed to join all necessary defendants (e.g. junior lien holders or the mortgage holder of record), or if the relied on evidence that was fraudulent (such as the affidavits of "robo signers"), then the Final Judgment may be vacated. This means, essentially, that even if the bank won a foreclosure lawsuit, was the high bidder at a foreclosure sale, and sold the house to an independent third party, the original homeowner may still ask the Court to vacate the Final Judgment and re-take possession, and ownership, of the home.

When meeting with a prospective short sale seller, ask pointed questions. While it may be uncomfortable delving into a person's financial situation, it is important for you, as a prospective short sale seller's agent, to understand the seller's situation thoroughly. The following are some questions you may want to ask: When did you purchase your house, and at what price? Who is on the mortgage, and who is the lender? Have you refinanced? How many mortgages are on the property? Are your payments current, and will you be able to remain current? If your payments are not current, how far behind are you? Have you communicated with the lender? Have you received any notices from the lender? Are you living in the property, or do you plan to relocate before closing? If the property is a member of a CIC, are association dues current? What is the condition of the property, and are any repairs needed? Are back taxes owed, or are there any liens on the property? Are your financial records available? (If the answer is no, have the seller begin gathering all documentation to prove their current situation.) Do you have cash for a shortage? In other words, if the property is sold short, can the seller bring enough money to the table to cover the shortage? This would protect the seller's credit and help them avoid a lender-involved short sale. Have you spoken with an attorney or an accountant? Housing counselor? Have you, or are you, considering bankruptcy? What caused you to miss payments, or why do you need to sell? Though it may seem like prying, this is important information.

Most lenders will begin the foreclosure process while evaluating whether to approve a short sale. Short sales are seen as a "significant derogatory credit event" by FNMA, and are lumped with bankruptcies in the way they are evaluated. Because of the possibility to receive a commission for a short sale transaction, licensees must be careful not to factor their own interests in any advice given to a distressed seller.

Include proof the buyer can buy. The lender will want to see earnest money, and a buyer's pre-approval letter with any offer. In some cases, a promissory note will suffice for earnest money, but many lenders want an actual earnest money check (you should provide the receipt and a copy of the check; the check must remain in the broker's trust account or with escrow, or held until there is mutual acceptance and/or approval). The pre-approval letter should include the: correct address of the property amount the buyers are pre-approved for amount being financed, and the amount of down payment. Include a complete copy of the purchase agreement. The short sale packet should include the offer itself: a copy of the purchase agreement, and all related addenda. Check to make sure all signatures are present, and everything is complete, legible, and correct. Names on the purchase agreement and pre-approval letter should match, for instance.

Next, you need to prove the seller's financial condition. Included in the short sale packet, with the offer, are documents proving the seller's financial hardship. These include: Seller's financial statements Last two months' bank statements at all institutions Last two pay stubs from any and all employers Tax returns Seller's hardship letter describing their financial condition and why they are unable to (or will soon be unable to) afford their mortgage payment.

B. The lender may start foreclosure proceedings after the mortgage is in default for at least 120 days.

No matter which stage the foreclosure process is in, options exist. The important thing to remember when speaking with a distressed homeowner is that there are always viable options. Burying their head in the sand is not one of these, however! As time progresses, so does the foreclosure process, and the options available begin to disappear. The earlier a homeowner can meet with a HUD-approved housing counselor, real estate attorney, and/or tax advisor, the more options the homeowner will have to choose from.

hapter 1: Short Sale Basics Lesson 1: Definitions of a Short Sale If you haven't handled a short sale transaction yet, you probably will soon. In many areas of the country, distressed properties (short sales and foreclosures) comprise 30 percent of the active listing market, or more. A short sale is a situation in which a homeowner must sell the home for less than is owed because of: A mortgage balance Liens Closing costs In a short sale situation, the seller walks away with nothing and the lender (or lenders; there are frequently more than one lender involved) walks away with less than the lender is owed by the homeowner. Sometimes, especially in the case of junior lienholders, the lender walks away with nothing (no return on the amount loaned). NOTE: Remember that there are two parties to a short sale—the buyer and the seller. The lender is not a party to the agreement between them, although completion of the transaction will require lender approval, via the short sale approval letter. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Not all approved short sales are created equal. To answer the question, "What is a short sale?" there is the easy answer: "Selling a home for less than is owed," and a more complicated answer that involves the outcome of the short sale. Consider the following possible varieties of a short sale outcome where the seller owes $250,000 for a condo that can currently be sold for $180,000: The bank says, "Sure, go ahead and sell, but bring $70,000 with you to closing." The bank says, "Go ahead and sell, but we reserve the right to later collect the $70,000, most likely through a collection agency to whom we will sell the right to collect." The bank says, "Go ahead and sell, but sign this promissory note that obligates you to repay the $70,000." The bank says, "Go ahead and sell and I will even forgive and relieve you of any requirement to repay the $70,000. Oh, but you will be held accountable to pay the IRS taxes on $70,000 in additional income. If you think it's no fun owing me money, wait 'til you owe it to Uncle Sam." The particular outcome a given seller sees depends on the agreement agreed upon with the lender. As the seller's agent, it is up to you to negotiate the best outcome possible for your client, the seller, while at the same time, not enraging the lender. You do need the lender's approval, after all. No matter what agreement is hammered out, there are ramifications to the short sale, including damage to a seller's credit, which we'll discuss in a bit.

The hardship letter must be to the point and must contain the appropriate information. Having a well-written hardship letter is second only to a good, solid offer from the lender's point of view on whether a short sale will be approved. A sellers' hardship letter should include a list of all of the factors that have caused them to fall behind (or will soon cause them to fall behind) on their mortgage payments. Eligible hardships include a job loss, income reduction, illness, relocation, divorce, medical bills, death of a spouse, etc. The seller should make a note of when each event occurred, listed in chronological order. The note should ring true (and be true), and it should convincingly build a case of hardship. The letter should be formatted properly, be free of grammatical errors, and be kept from one to two pages. Lenders receive hundreds, even thousands, of hardship letters, so to be effective the letter must be concise and to the point. When listing the reasons why the sellers fell behind on their payments, they should also detail (and wherever possible, document) the steps they took to correct the situation. For example, if one or more of them recently became unemployed, they should describe how they tried to find a new job, and the results of their efforts. The very end of the letter should be a request for a short sale, including that the seller is aware of the consequences associated with this event and desperately would like to avoid foreclosure or bankruptcy.

Now, hurry up and wait (take action while waiting for approval). Waiting for approval on a short sale can seem to take forever, though most lenders try to streamline the process. It's important to not lose ground while waiting, because it's possible the short sale offer will be denied. While waiting for the lender's approval for the short sale, you'll want to continue to market the property. In addition, you should contact the lender to confirm receipt of the short sale packet, and document that call, including the date, time, and name of person you spoke with. Try not to come off as brusque, rude, or impatient. The person you're speaking with doesn't know you or your clients, and likely has dozens of agents and borrowers hounding them daily, so being pushy will only get your short sale packet shoved to the bottom of the pile. Be professional, polite, and consistent. Call your lender contact weekly to check for a status update, and keep the buyer's agent informed weekly as well, even if there is nothing to report yet. Remember: that agent has an anxious buyer waiting for word daily. A weekly check-in is appropriate, or more if there is something substantive to report. If other offers come through that the seller accepts, continue to submit these to the lender. Let your sellers know that they will still need to make the property available for showings. There is no deal until bank approval, and there is no reason to turn away a prospective buyer.

Fraud perpetrators don't wear signs, but they do sometimes carry red flags. On the surface, fraudsters do not act or appear criminal. They are most frequently nice and clean-cut, and seem kind, helpful, patient, and trustworthy. Their "companies" appear to be well-established and reputable. Some companies may seem to be related to the government, even using government sounding names. Fraud perpetrators may be appraisers, accountants, attorneys, bank officers, landlords, tenants, friends, and colleagues. Because agents are often named in cases of mortgage fraud (whether they are innocent or not) it is important to know what to look for, and steer clear if you suspect mortgage fraud is being perpetrated. Following are some types of red flags that could signal mortgage fraud.

Red flag #1: Home deeded back or gifted to a relative. Short sales transactions are supposed to be arms-length transactions, with the seller completely out of the future purchase. But sometimes a seller will get a relative to purchase the home at the discounted price. The relative never intends to live there or make payments. Then when the sale closes, the relative deeds the property back to the seller. This is mortgage fraud, and it is illegal, whether the "straw buyer" is a relative who is not compensated or another individual who is. If you suspect the buyer may be related to the seller, or be on familiar terms with the seller, or if it seems that a buyer who is supposedly planning to move into the short sale home is making no preparations to do so and seems less interested in the transaction than a typical buyer would be, these are all red flags that should be investigated.

Red flag #2: A BPO or appraisal seems out of line (either too high or too low). Appraisal fraud can take many forms. Either the agent or appraiser is in cahoots with the listing agent to artificially lower the opinion of value, at which time the listing agent's best friend swoops in, buys the short sale and then they immediately sell it for a profit, splitting he proceeds with the listing agent. The appraiser need not even be involved. There are "reverse stagers" who advertise their services online. Their role? Make the house look less desirable before the appraisal, artificially lowering the appraised value. Lenders will also participate in the appraisal fraud game, getting their own appraisers to justify the list price rather than the appraised price the buyer's appraisal came in at, so the lender doesn't have to lower the price to make a sale. Here's one agent's story where this happened. Another type of appraisal fraud is when the appraised value is artificially inflated so the owner of the property can obtain a loan against the property to either: access the cash and walk away, or use the cash as down payment on a short sale or other property. Here is an example from Examiner.com. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Red flag #3: Payments do not show up on the Closing Disclosure. As mentioned, any payment that does not show up on the Closing Disclosure, or is diverted from the party listed on the Closing Disclosure to another party is mortgage fraud. Any time you hear of money being exchanged outside of closing, it should raise a red flag, and you should investigate.

There are special considerations when going the rent-it-out-route. Renting out a home requires certain adjustments. First, the homeowner will need to change their homeowner's insurance to rental insurance. They need to compute their budget (mortgage payment, insurance, and upkeep) to determine carrying costs, and consult local rates to determine an appropriate rental rate to charge. The homeowner must also be aware that tax consequences can result from changing the property over from a home to a rental property. As a landlord, the homeowner can deduct certain expenses (repairs, insurance, maintenance, and property management fees) directly from rental income; this may provide some tax relief. However, if the homeowner later decides to sell, the capital gains deduction ($500,000 in gains tax-free for couples, $250,000 for singles) may not apply unless they have lived in the home in at least two of the last five years. So, it's a good idea for the homeowner to keep an eye on the calendar, and plan accordingly. Leases should also be designed with this plan in mind. There are some situations where renting may not be an option, such as an HOA requirement prohibiting rentals.

Refinancing may be an option. While the very definition of a short sale means that more is owed on the home than the current mortgage balance which makes refinancing impossible, some loan programs, such as the Home Affordable Refinance Program (HARP) allow up to 125 percent for refinancing. Provided the home's market value is not more than 25 percent under its loan balance, this may be an option. If the home was originally financed at a higher interest rate, this can actually help the homeowner save money in the long run with a lower monthly payment. VIRTUAL FIELD TRIP: For information about the HARP program, which has been extended through December 31, 2015, visit the Making Home Affordable site.

Another alternative to a short sale is a contract for deed. If the seller is able to find a buyer to take over the mortgage payments in a contract for deed, this can be an excellent alternative to a short sale. However, if the home has declined significantly in value, this may not be an option. To make it more palatable to the buyer: The seller may have to make up the difference in payments between what the buyer can and should afford, and the reality of the monthly payment to the bank. The seller can provide favorable financing terms. While contracts-for-deed can appeal to a wider range of buyers, especially in the current tighter financing market, the ability of the new buyer to make the payments must be thoroughly investigated. A sizable down payment can help alleviate seller worries of default.

Renting out the property may also be an option. When mortgage payments become unaffordable, renting out the home and moving in with relatives or finding low-cost housing may help fill the gap. The homeowner will likely have to make some portion of the payment so that the property will not change from a personal residence to an investment property with tax consequences as a result, but the monthly rent received will provide instant relief, and allow the homeowner to retain ownership until their situation improves, or until the homeowner is able to refinance at a lower rate. As a real estate licensee, you do not make a commission if your client rents their home out, but if your brokerage and license allows you to perform property management activities, it is possible you can receive management fees. Just keep in mind the number one rule: put the client's best interests ahead of your own. If renting is truly the best scenario, whether you will be compensated or not, that is the route you should advise your client to take.

Another requirement is an improved credit score. The two-year wait and loan-to-value ratio of 80 percent (meaning the buyer must put at least 20 percent down) are just two factors recommended to lenders considering making a home loan to someone who has experienced a short sale. The "Eligibility Matrix" mentioned is also recommended; it is based on a number of factors, but requires a minimum of a: 620 credit score for fixed rate loans and 640 credit score for adjustable rate mortgages. So, even if a short sale seller manages to save enough for a 20 percent down payment after two years, a 620 credit score will be required. This may be a difficult score to reach after the credit damage done by a short sale.

Short sales can present a conflict of interest for licensees. Because of the possibility to receive a commission, when a homeowner asks you for advice about a short sale, it is vital that you do not let your own interest in a short sale commission factor in to that advice. In fact, it would be wisest not to steer a client toward any decision, but instead steer them toward a tax advisor, real estate attorney, and/or HUD-approved housing counselor. NOTE: Why do some of us continue to harp on "HUD-approved" housing counselors? They offer their services for free or at a low cost, and, because they have been screened by HUD, there is a much lower chance they will be predatory scam artists preying on distressed seller

Short sales can present a conflict of interest for licensees. Because of the possibility to receive a commission, when a homeowner asks you for advice about a short sale, it is vital that you do not let your own interest in a short sale commission factor in to that advice. In fact, it would be wisest not to steer a client toward any decision, but instead steer them toward a tax advisor, real estate attorney, and/or HUD-approved housing counselor. NOTE: Why do some of us continue to harp on "HUD-approved" housing counselors? They offer their services for free or at a low cost, and, because they have been screened by HUD, there is a much lower chance they will be predatory scam artists preying on distressed seller

Short sales may impact other issues beyond future homeownership. Even if a homeowner does not intend to purchase a new home in the next few years, the severe impact on their credit score from a short sale can harm them in other areas. For instance: Employment—many employers use credit scores as an indicator of a person's integrity. Licensing—some licenses, such as a security license, may be impacted by a lowered credit score. Rental applications—Credit scores are used by property managers and property owners to evaluate a prospective tenant's ability to pay rent. Lowered scores can eliminate some tenants.

A 1099-C will be generated from the sale. The homeowner will receive a 1099-C, Cancellation of Debt, after a short sale closes, which shows the amount of debt cancelled. This amount is considered "cancellation of indebtedness income," and must be reported by the IRS. However, under the Mortgage Forgiveness Debt Relief Act of 2007, the homeowner may be able to exclude part or all of this income if the debt was qualified principal residence indebtedness, or if the homeowner was insolvent before the debt was discharged. Many short sale sellers would qualify under one or more of these exceptions.

The Mortgage Forgiveness Debt Relief Act of 2007 generally allows certain taxpayers to exclude income from the discharge of debt on their principal residence. Prior to the Mortgage Relief Act, exceptions applied under Code Sec. 61(a)(12) and Code Sec. 108 for debtors in Title 11 bankruptcy cases, insolvent debtors, certain student loans, certain farm indebtedness, and certain real property business indebtedness. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure or short sale, qualifies for the relief under the Mortgage Forgiveness Debt Relief Act of 2007. This provision applies to debt forgiven in calendar years 2007 through 2013. Up to $2 million of forgiven debt is eligible for this exclusion ($1 million if married filing separately). The exclusion does not apply if the discharge is due to services performed for the lender or any other reason not directly related to a decline in the home's value or the taxpayer's financial conThe clock is ticking. If you have a client who will realize "windfall" (as it is deemed) of debt forgiveness near the end of the year, it is crucial that the transaction conclude before the end of the year. If closing does not occur until the following year, and the relief laws are not extended, the homeowner could incur a huge tax bill. Let's take two scenarios: The Kawalski's, who are in a 33 percent tax bracket, close on their short sale December 15. Debt forgiven: $115,000. Tax penalty: $0. The Smiths, who are in a 33 percent tax bracket, and were scheduled to close on their short sale December 20, don't close until January 5. Debt forgiven: $115,000. Tax penalty: $37,950. Ouch. The difference of a few days cost the Smiths nearly $37,950. The moral of the story is, if a short sale can be closed by the end of the year, it should be. An agent who is responsible for a delay that results in a whopping tax bill for the client could be sued by the client. dition.

When submitting the offer to the lender, include a complete short sale packet. A lender will not approve a short sale offer without additional information, often referred to as the "short sale packet" or "short sale package." Each lender has different requirements for the types of items it wants in the short sale packet, and some lenders will require you to use their forms, so the earlier you can verify their requirements, the better. With your client's permission: Ask to speak to the "loss mitigation" department. If possible, try to get a name and contact number of the specific staff member who will review your short sale packet. Ask what requirements the lender has to submit a short sale offer.

The first item you'll need is a Seller Authorization form. The Seller Authorization gives the bank permission to speak to you about their financial situation. Some banks will require you to use their forms. If in doubt, ask. The smallest things can delay a short sale approval. Make sure to do exactly what the lender wants, in the way the lender wants it, and when the lender wants it. Next you will present an offer summary. An offer summary simply describes the offer on the table, whether it is contingent (the bank will likely deny any contingent offers), how quickly the buyer can close, and any other terms. Items that should be included are: Loan number [always include the client's loan number; lenders file everything by this!] Borrower's name and address, and amount outstanding Buyer's name and address, and amount offered Any terms relevant to the transaction Closing date requested (leave time for the approval process, but not too much time). Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

esson 3: Evaluating the Short Sale Seller and the Property It is important that sellers understand their situation, and their options. When you first meet with a seller to discuss a potential short sale, it is likely the seller will already have some preconceived notions. It is also likely these notions are incorrect. Sellers often get their information from the media, their neighbors, or someone like their Uncle Bob. It is important, therefore, in the early stages of meeting with a seller, to: get a good idea of the seller's situation and mindset be able to describe the ramifications of a short sale be able to describe various alternatives to a short sale recommend the seller speak with a housing counselor, attorney, or tax advisor (or all three) before making a decision.

The first step in understanding is the impact of a short sale on credit. A seller may be under the impression that selling short is a way to avoid or minimize a severe credit hit. While the prevailing logic is that the credit damage done by a short sale is significantly less than that of a bankruptcy or foreclosure, many financial experts say otherwise, and state that a short sale is as bad, or nearly as bad in terms of the seller's ability to both afford and qualify for a subsequent home purchase. In any case, a seller should be told that a short sale is not a get-out-of-jail-free card. The seller will take a credit hit, and a hard one at that. However, if the seller is already in default, most of that damage has already been done, and a short sale may help relieve the pressure.

After a homeowner has been served with a Notice of Default, the foreclosure process is underway. The Notice of Default is a very important document in the process of foreclosure because it outlines what the homeowner can do to avoid foreclosure on the home. If the homeowner doesn't respond to the notice, the lender will continue to move toward foreclosure. If you have a client who has been served with a Notice of Default, tell your client this is not something to ignore! The problem will not go away by itself. If your client hasn't already contacted a HUD-approved housing counselor, receiving a Notice of Default is a big signal to do so.

The foreclosure process varies from state to state. In some states, a homeowner has the opportunity only to delay the public sale for a few months, in exchange for shortening the redemption period to a few weeks. The process is complicated, so the homeowner should be advised not to wait until the last minute if they truly wish to postpone the sale. Why would a homeowner want to postpone the sale? Their financial situation has improved. They see a possibility to repay the loan in full, but need more time. They are not prepared to move yet.

The hardship letter must be to the point and must contain the appropriate information. Having a well-written hardship letter is second only to a good, solid offer from the lender's point of view on whether a short sale will be approved. A sellers' hardship letter should include a list of all of the factors that have caused them to fall behind (or will soon cause them to fall behind) on their mortgage payments. Eligible hardships include a job loss, income reduction, illness, relocation, divorce, medical bills, death of a spouse, etc. The seller should make a note of when each event occurred, listed in chronological order. The note should ring true (and be true), and it should convincingly build a case of hardship. The letter should be formatted properly, be free of grammatical errors, and be kept from one to two pages. Lenders receive hundreds, even thousands, of hardship letters, so to be effective the letter must be concise and to the point. When listing the reasons why the sellers fell behind on their payments, they should also detail (and wherever possible, document) the steps they took to correct the situation. For example, if one or more of them recently became unemployed, they should describe how they tried to find a new job, and the results of their efforts. The very end of the letter should be a request for a short sale, including that the seller is aware of the consequences associated with this event and desperately would like to avoid foreclosure or bankruptcy.

The hardship letter must be to the point and must contain the appropriate information. Having a well-written hardship letter is second only to a good, solid offer from the lender's point of view on whether a short sale will be approved. A sellers' hardship letter should include a list of all of the factors that have caused them to fall behind (or will soon cause them to fall behind) on their mortgage payments. Eligible hardships include a job loss, income reduction, illness, relocation, divorce, medical bills, death of a spouse, etc. The seller should make a note of when each event occurred, listed in chronological order. The note should ring true (and be true), and it should convincingly build a case of hardship. The letter should be formatted properly, be free of grammatical errors, and be kept from one to two pages. Lenders receive hundreds, even thousands, of hardship letters, so to be effective the letter must be concise and to the point. When listing the reasons why the sellers fell behind on their payments, they should also detail (and wherever possible, document) the steps they took to correct the situation. For example, if one or more of them recently became unemployed, they should describe how they tried to find a new job, and the results of their efforts. The very end of the letter should be a request for a short sale, including that the seller is aware of the consequences associated with this event and desperately would like to avoid foreclosure or bankruptcy.

Junior lienholders can delay (or derail) a short sale in process. If there is more than one lender involved, the short sale could be held up if the seller cannot get the junior lien holder to approve the short sale. The sale can only happen when all lien holders on the property agree to the short sale. Lenders holding second mortgages on the property (such as home equity lines of credit or piggyback loans) are often the ones absorbing the biggest loss. Often, there will not be enough funds left to pay off any of the junior lien holder's funds. This is where negotiations (and time delays) begin.

The seller may derail the process. The reason that sellers can accept multiple offers is that all offers are accepted "pending lender approval of the short sale." This means there is no deal until approval, and it also means that the seller may retract the acceptance at any time before lender approval. Why would a seller do this? The seller may have been able to arrange funds to stop the sale. The bank may be too far along in the foreclosure process, and the seller decides to "throw in the towel" and accept foreclosure. The seller may decide to file for bankruptcy. The seller may accept a higher offer. The seller may not like the way the negotiations are going, realize there will be tax consequences or unresolved debt issues, and decide the short sale is not the best option. As a buyer's agent, you should counsel your buyers not to get too emotionally attached to a short sale property, and let them know that anything can—and often does—happen on the way to lender approval and the closing table.

The lender will order a Broker Price Opinion (BPO). Sure, you've written a beautiful CMA, and maybe you even have an offer that matches it, but the lender is not simply going to take your word regarding the property's value. The lender will likely order a BPO to either validate or repudiate your list price, and to either justify or contest the offer that's currently on the table. If you can, find out when the BPO has been ordered, and meet the BPO agent at the property. Bring your comps from your CMA (and a copy of the CMA itself), and have a discussion with the BPO agent about anything unique about the situation. If the BPO is unfamiliar with the neighborhood, make sure you hit the highlights and lowlights. If the BPO does not support the current offer on the table, it is unlikely the lender will approve the short sale. Whether the lender approves or not, you will want to get the lender's response as soon as possible so you can act accordingly. If it is an approval, mark the sale as pending and head toward closing. If it's a denial, you will need to counter.

There are many reasons a lender may reject a short sale offer. These include: The offer price is too low. Lenders will normally set the minimum net proceeds from a short sale of the property. The short sale package submitted by the seller is incomplete. The seller is not eligible for a short sale. The buyer is not eligible (financing is not in place). The short sale is not an "arm's length" transaction. The buyer must be unrelated and unaffiliated with the seller. A short sale is not evaluated as the best financial option for the property. Frequently a lender will respond to a short sale offer with a counteroffer. This is almost a requirement for lenders to prove they have satisfied their fiscal obligations. Unit Quizzes and the minimum required study time must be met to unlock Final Exam.

Short sale buyers also need the facts. Prospective buyers of short sale properties should understand from the beginning that short sales are not for sissies! In "short," there's nothing short about them. Even with many lenders putting streamlined processes in place, the average short sales can take a month or even two months longer than a traditional short sale. Short sales do not mean instant equity. Many short sale buyers are under the impression that short sales a great bargains because they will gain instant equity at closing. Their reasoning goes like this: the seller owes more for the home than I'm paying, so I'm getting a home for less than it's worth. If that were true, it wouldn't be a short sale because the seller would just sell it on the open market for the amount owed or more. The reason the seller does not do this is that it will not fetch what the seller owes on the open market. The market has declined or the seller paid too much. There is no such thing as instant equity on a short sale.

Timing depends on the short sale status. There are two main categories of short sales: Approved for short sale Third-party review required. "Approved for short sale" means that the bank has already determined that the seller qualifies for a short sale, and has approved the seller's request to sell the property at a reduced price. Frequently it also means that an earlier buyer made an offer that was approved, but did not close the transaction. Let your buyers know that making a solid offer on an "approved for short sale" listing may mean a quicker response, because the seller no longer needs to be qualified. "Third-party review required" means that the seller has not yet sought, or received approval from the lender to do a short sale. This can add several weeks or months to the closing process, and there is always the possibility that the lender will deny the seller's request.

Seller Alternatives and Other Considerations Before assisting a seller with a short sale, ask if other options have been considered. You are the real estate expert. This comes with great responsibility, because customers and clients depend on you to inform them when considering a course of action. The responsibility to act in the client's best interest can sometimes mean not acting at all. If a seller asks you to help with a short sale, before assisting in the process, it's vital that you ask some questions. Such questions might include the following: What is it about your current financial situation that has you contemplating selling short? Do you understand the ramifications of a short sale on your credit report? Do you understand there is a possibility that the short sale will not relieve your debt obligations? Have you met with a housing counselor, a financial advisor, or an attorney? Have you considered alternatives to a short sale?

Two federal loan programs offer assistance to distressed sellers. The HAMP (Home Affordable Modification Program) helps homeowners who want to and can afford to stay in their homes modify their loans to an amount no greater than 31 percent of their gross (pre-tax) monthly income. If eligible, the modification permanently changes the original terms of the mortgage. HAMP is a voluntary program, but many lenders choose to participate because there are incentives for lenders who do. Unfortunately, HAMP has very strict guidelines, and most homeowners won't qualify for the program. HAFA (Home Affordable Foreclosure Alternatives) is for sellers who can no longer afford to remain in their homes. Two options are available through HAFA: a short sale, or a deed-in-lieu of foreclosure. The HAFA short sale differs from a traditional short sale in that the participating lender guarantees to waive the deficiency amount. The lender also works with the seller to determine an acceptable sales price. HAFA short sales may be less damaging to the seller's credit than a traditional short sale, and HAFA may provide the seller with up to $3,000 in relocation assistance.

What happens when the debt is NOT forgiven? Remember our four scenarios for how a bank might respond to a short sale approval, even if the bank approves the short sale? The bank says, "Sure, go ahead and sell, but bring $70,000 with you to closing." The bank says, "Go ahead and sell, but we reserve the right to later collect the $70,000, most likely through a collection agency to whom we will sell the right to collect. And they won't be very nice about it." The bank says, "Go ahead and sell, but sign this promissory note that obligates you to repay the $70,000." The bank says, "Go ahead and sell and I will even forgive and relieve you of any requirement to repay the $70,000. Oh, but you will be held accountable to pay the IRS taxes on $70,000 in additional income. If you think it's no fun owing me money, wait 'til you owe it to Uncle Sam." The bank does not have to approve the short sale, and if it does, it does not have to forgive the debt. The bank could require, as a condition of approving the short sale, that the seller sign a promissory note agreeing to pay back the shortfall. Or it could require the seller to bring money to the closing table, or it could turn the unpaid amount over to a collection agency.Read the fine print; make sure your clients understand their obligations after the short sale. Whatever option the bank chooses will be part of the short sale agreement between the sellers and the lender. Sometimes sellers are able to use the foreclosure option to their advantage, letting their lender know that if their debt is not forgiven, they will allow it to go into foreclosure. Banks don't like foreclosing on homes because it's costly, it creates a delay, they frequently reap less than they would in a short sale, and because they are not in the business of ownership; they are in the business of loanership. The sooner their funds are freed up, the sooner they can loan them out and begin making money on them. So sometimes just the threat of allowing the property to go into foreclosure will be enough to sway a bank into forgiving the debt. However, if the lender believes there is a good possibility it can recoup more with foreclosure plus a debt collection, this strategy will not work.

What happens when the debt is NOT forgiven? Remember our four scenarios for how a bank might respond to a short sale approval, even if the bank approves the short sale? The bank says, "Sure, go ahead and sell, but bring $70,000 with you to closing." The bank says, "Go ahead and sell, but we reserve the right to later collect the $70,000, most likely through a collection agency to whom we will sell the right to collect. And they won't be very nice about it." The bank says, "Go ahead and sell, but sign this promissory note that obligates you to repay the $70,000." The bank says, "Go ahead and sell and I will even forgive and relieve you of any requirement to repay the $70,000. Oh, but you will be held accountable to pay the IRS taxes on $70,000 in additional income. If you think it's no fun owing me money, wait 'til you owe it to Uncle Sam." The bank does not have to approve the short sale, and if it does, it does not have to forgive the debt. The bank could require, as a condition of approving the short sale, that the seller sign a promissory note agreeing to pay back the shortfall. Or it could require the seller to bring money to the closing table, or it could turn the unpaid amount over to a collection agency

The seller wants out; the seller wants the short sale, and the seller will likely accept any offer presented. But the offer still has to get by the bank. Short sales require: The acceptance of the seller The approval of the lender. This extra step would add time to any transaction, but add to it the fact that it is a bank on the other end of the line, and, cue the calendar pages riffling away: it's going to take some time. If you're working with buyers of a short sale property that will likely receive multiple offers, make sure the buyers put their best foot forward by: Submitting a solid offer that closely reflects the market value of the property. Completing all the required short sale paperwork in a timely manner. Having a strong pre-approval letter. Putting down a sizeable earnest money deposit.

What should buyers do besides wait? Should they make multiple offers? They can make sure their financing is in order, and line up contractors to solicit bids. What they should not do is count their chickens. The seller will sign any offer, the listing agent will present any offer, and the lender will consider any and all offers presented, and the fastest and highest doesn't always win. The lender is about to take a loss on this property due to borrower financial difficulties; it will want to make sure that the next buyer has solid financing arranged or, better yet, is paying cash. The lender is in no hurry, but will usually not intentionally delay. Another thing the buyers should not do: pay any out-of-pocket costs until their offer has been approved by the lender. That generally means the buyer should not incur the cost of a home inspection until after their offer is approved by the lender. Buyers should be aware that although there is a lender approval contingency as part of the short sale, the purchase agreement between the buyer and seller is a legal, binding contract. Buyers should not make multiple offers on short sale properties (or any other properties) unless they are prepared to purchase them all.

With a short sale, a seller's motivation is different than with a traditional sale. A seller is not motivated to get the most amount of money possible for the home. This is because no matter how much money the home sells for, it will not be enough to both pay back the lender and walk away with any profit. Because the seller does not expect to get any proceeds from the sale, the seller's motivation is simply to sell quickly, at a price the lender will agree to, and not to sell at the top of the market. Of course the lender may have other ideas; any short fall will be money the lender does not collect that it had been expecting to receive. Therefore, short sales should be priced with both the need of the seller to sell quickly and the need of the lender to sell at the best price, given the market.

When a seller owes more than a home can be sold for, the seller is said to be upside down. An upside down situation is one in which the amount owed for a home is more than the amount the home can be sold for in the current market conditions. This is said to be "upside down" because it is contrary to how homeownership is supposed to work. Usually home ownership is a great investment that returns, at sales time, enough funds to not only recoup the homeowner's initial down payment, but equity and appreciation as well. However, when buyers buy at the top of the market, as many homeowners did in the housing frenzy of 2005-2006, and purchase under questionable financing terms (many bought in over their heads because of this), and then the market takes a nosedive, as it did in mid- to late 2007, homeowners find themselves paying high mortgage payments on a declining value investment—never anyone's favorite scenario! Add job loss to the equation, and you have a recipe for a short sale.

Buyers and Distressed Properties; Mortgage Fraud Lesson 1: Strategies When Working with Buyers Interested in Distressed Properties Buyers should be told the whole truth about distressed property transactions. As real estate licensees, we sometimes assume knowledge on the part of the general public that it does not possess. This is never truer than with buyers and distressed properties such as REOs and short sales. Buyers often think that, because a property is a short sale or a foreclosure, it's a bargain. They also often believe that short sales are similar to other transactions: once the seller accepts, the house is theirs. You know better. It's important to make certain your clients do as well. While there is a lot of crossover concerning the issues inherent in distressed property purchases, there are enough differences between a foreclosure and a short sale purchase to warrant separate discussion. First we'll discuss buyers considering purchasing foreclosures.

ake sure buyers know about the foreclosure "Dirty Dozen." In your initial meeting with your clients, make certain they understand the Dirty Dozen about foreclosed on properties. Just because it's a foreclosure doesn't mean it's a bargain. Lenders want to get as much money as possible for their REOs, and will therefore price as high as the market will bear. Most foreclosures need repairs. Former homeowners often let their homes fall into disrepair; some even do damage as some retaliation against their lender for foreclosing. That first visit may be ugly. Although most banks prepare homes for resale, the glut of foreclosures in some areas has caused a backlog of maintenance issues. Trash may be left behind, there may be stained carpets and walls, animal smells, etc. In a bidding situation, an inspection may not be possible until after the offer is accepted. Many foreclosures are unavailable for viewing during the bidding process. Until an offer has been accepted, the buyer is going on a drive-by and any interior photos available (there may be none). No appraisal, no inspection until after there is a winning bidder. The lender will not do repairs. Lenders are already taking a loss when they take back a property. If the property had equity in it, the former owners would have sold it rather than allow it to be foreclosed on. Therefore the owners were likely upside down, meaning the lender is not getting back what it paid out in loan funds. On top of that, foreclosures are costly and the lender won't want to add repairs to the list of financial hits it has already taken. Appliances may be missing. It's not uncommon for the owners to grab anything of value: appliances, copper wiring from the walls (!), doors, light fixtures, on their way out the door. The buyers will need to figure in the cost of new appliances when crunching numbers on a foreclosure "bargain." Sometimes these acts are not committed by the homeowners, but vandals who break in to empty houses, looking for valuables. Lenders may also be the culprit! To prevent theft and break-ins, frequently lenders will have appliances removed. Financing can be an issue. In a typical foreclosure auction, the highest bidder must pay in full within 24 to 48 hours of winning, and payment must be made by cash, check or money order. If your clients plan to finance a foreclosure, they will need to secure a loan prior to bidding. This can be exceedingly difficult, because they will have to estimate how much they will need to bid to buy the property, which will not be known until the auction concludes. The client and their lender will likely have to agree on a maximum limit, and the lender would have to agree to lend up to that amount. If the bid exceeds that limit, the buyers will either need to pay the difference in cash or lose the property. One solution is to ask the bank selling the property if it will finance it. Often favorable rates or terms will be offered to effect a quick sale.

Lenders don't pay for certain closing costs. Lenders are in the business to make money, not spend it. The lender is already likely taking a bath on the sellers' loan, and will be unwilling to pay for much in the way of closing costs. This is important to note because if the preliminary HUD arrives and it shows the "seller" paying closing costs that the lender won't allow, the whole transaction is at risk. Remember that, although the purchase agreement is between the seller and the buyer, the lender must approve all terms. These include closing costs. Typical closing costs a lender will not pay include: Title evidence Utility bills Repairs (don't even ask!) Well/septic tests Home inspection report More than 3 percent of the buyer's closing costs Appraisal re-inspection Courier or wire fees Recording service fees.

eview the Closing Disclosure for any surprises (lenders hate surprises). In addition to making certain that the Closing Disclosure does not include the disallowed seller-paid closing costs already mentioned, there should be no lender work orders, and the net to seller should be $1,500 or less. The lender is losing money; it will not want to see the seller walking away with much, if any, proceeds at closing. There are certain government programs designed to encourage and provide incentives to lenders and sellers to sell short, rather than go into foreclosure. These sometimes will include moving fees for the seller of up to $3,000. These would be acceptable by the lender, who is likely getting an incentive of its own under the program.

f you need to submit a counteroffer, try to get a response quickly. You have the lender's attention. Now is no time to delay. If the lender denies the short sale offer and counters it, try to ask the cooperating agent to get you an answer quickly. Explain that the BPO came in higher, time is of the essence, and you don't want the short sale moved to the bottom of the pile. Follow up to get all necessary signatures and a fully executed sales agreement. Now, update the status in MLS: you're pending! Congratulations. One hurdle down—and it's a big one. After escrow has been opened, a preliminary HUD will be sent, and you will be on your way to closing, but there are a few more hurdles left. No resting on your laurels, yet!

hapter 2: Closing on a Distressed Property Lesson 1: Closing the Sale Short sales come with their own set of closing issues—for starters: closing! One issue that occurs during short sale transactions is that the closing date, to the lender, is written in stone. After the date has been agreed upon, both parties must do everything in their power to meet it. If the closing date is not met, the lender can disapprove of the short sale. After all, the lender agreed to "a short sale consisting of $183,000, to be closed on or before August 1." The lender did not agree to "a short sale consisting of $183,000, to be closed on or before August 5." The lender can withdraw its approval if all of the terms of the short sale are not met. Make certain that the cooperating broker knows this. Often, short sales are a race against the clock. Their opponent? Foreclosure. The bank will likely have started foreclosure proceedings, and even if a short sale approval has been granted, if the foreclosure process is well under way and there is a glitch in the transaction (such as a missed closing deadline), this may be all the more reason the bank needs for cancelling the approval (technically, all the bank will have to do is not agree to an extension) and proceed with the foreclosure.

When a lender forecloses and then sells the property for less than the amount borrowed, this is not considered a short sale. If a lender goes through a foreclosure process on a property, then sells the property for less than what was originally owed by the foreclosed on homeowner, this does not constitute a short sale. It is simply a foreclosure, and, like a short sale, is considered a distressed property sale. Foreclosed on properties are actually easier from an agent (and buyer) point-of-view because there is only one approval needed for the offer: the lender's. In a short sale situation, both the seller and the lender must approve the offer, as per the following: The seller accepts the offer, and then submits the offer to the bank for approval. The lender approves or does not approve the short sale (the approval process can take several weeks).

hort sales are losing their stigma. With so many homes going into foreclosure, what used to be a cause to hang a person's head down in shame (i.e., losing your home, or being force to sell short) is becoming more of a face-the-music club—one in which there are many members. The original stigma of short sales has faded as more homeowners realize the benefit of their lenders releasing them of all the financial obligation and being given the chance of starting over. In addition, properly handled short sales, as compared to foreclosure, or "walking away" from the property, are less damaging to the homeowner's credit rating. Real estate licensees, too, are embracing short sales. Because of the large number of short sales on the market, many real estate licensees who at one point said, "I'll never do a short sale," have had to eat their words in order to eat at all! In some markets, short sales ARE the market, or at least a large enough portion that cannot be avoided. Therefore, getting trained in and educated on the short sale process can help you not only provide better service to your clients in a difficult situation, but also help you close more transactions.

Comparables should be realistic, and not selected to justify a specific price point. When selecting comparables, make certain it will be obvious to the lender why the comparable was selected. You will want to select homes that closely match your subject property in terms of age, location, size, amenities, number of bedrooms and bathrooms, style, condition. Whenever there are differences, assign a dollar value, and come up with a price. Include both short sale homes and non-short sale homes. In addition to the statistics (room size, square footage, age, etc.), include color photos of the interior and exterior of the home (when possible), and a map pinpointing where the comparable is located relative to the subject property. When there aren't enough comparables in a specific neighborhood, try to select comparables from another similar neighborhood—one that would appeal to the same buyer profile. Be prepared to justify your selection. In fact, don't just be prepared: justify it! Document on paper why the comparables were selected, especially if they are not adjacent neighborhoods.lace the short sale on MLS, and market it as you would any other property (sort of). A short sale should not be short changed when it comes to marketing efforts. All of the regular activities you would normally put into marketing a home (advertising, signage, lock box, open houses, flyers, MLS listing, and obtaining quality photographs) should be used in a short sale. There will be some exceptions: if the home's interior is not in good condition due to the sellers no longer caring, it may be best to note this in the agent remarks section of the MLS, and avoid interior shots that will not show the home at its best. Never fail to disclose material adverse facts, however! Also on the MLS, you will need to notify other agents and their clients that this is a short sale (or potential short sale, if that is the case) transaction that will require third party approval (the lender). You should have a discussion with the seller about future price reductions, if they become necessary. Determine in advance how long you will allow the property to remain at a given price point before lowering it, and how much you will lower it by. Use usual time on market statistics to help make this determination: how long are homes selling, on average? If the home stays on the market longer than this, it is either a below-average home, or it needs a price adjustment.

ry to have a discussion with the lender about price (just try). If in doubt about pricing, you can always ask (though the lender may not tell you), "What will you accept?" Before having a conversation with any lender, however, speak to your client, gain permission to contact the lender on their behalf, and ask your clients to be part of the conversation. A three-way call is best; this way there are no misunderstandings later. Chances are you will not get a helpful answer from the lender this early in the process, but you can try! You may also find that part of the negotiation process with the lender will be about YOUR commission. Yes, the listing agreement is between you and the seller, and you can work out whatever terms you both agree to, but because the lender will have to approve the short sale request, it has leverage in this area. Stand strong, but prepare to be flexible. Short sales frequently do not pay as well as non-distressed property transactions. Any commission reduction is usually split between the buyer's agent and the listing agent. If this is your intent, it should be stated upfront in the MLS listing before you receive a purchase agreement.

Qualifying factor #3: The seller must be able to demonstrate a bona fide hardship. Seller hardships have many causes. Though it may be a sensitive subject, a bank will want to know (and one of the first questions you should ask is), "What are the financial circumstances that led you to contemplating selling short?" Factors sellers often cite include: Unemployment Reduced income Business failure Damage to the property Death of a spouse or a wage earner Severe illness/medical emergency Large tax bill Divorce/separation Relocation Military service Mortgage payment adjustment to an unaffordable amount Large debt, no assets, bankruptcy Incarceration Whatever the seller's reason(s) may be, the bank will want proof, so in the early stages of meeting with a client who has (on the advice of housing counselor, attorney, accountant, etc.) decided to sell short, have them start gathering documentation of their hardship.

ualifying factor #4: The seller has no assets. As part of the short sale approval process, the lender will probably want to see a copy of the seller's tax returns, or a financial statement, or both. If the lender discovers assets, the lender may not grant the short sale because the lender will feel that the seller has the ability to pay the shorted difference. Sellers with assets may still be granted a short sale but could be required to pay back the shortfall. For example, if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts (enough to make up the shortfall), the lender will determine that the seller has assets, and will deny the short sale. However, even if a full short sale is denied, the lender may discount the amount the seller is required to pay back.