LOTUS REALTY GROUP
Specific Short Sale Qualifications
There are three basic qualifications:
1. There has to be a hardship
2. There has to be a change in income
3. The Client has to be insolvent
Hardships include:
a. Death, illness, divorce, incarceration, bankruptcy.
b. Income changing due to job loss or a pay cut.
c. A job transfer with pay cut.
d. Insolvency - the client must not be able to pay down the mortgage. They have to be financially insolvent meaning that they owe more than they have and they do not have liquid cash or assets that could be used to pay down their mortgage. If they do have liquid cash or assets they will be expected to use these to pay down their mortgage.
You will run across a borrower that tells you they do not need to sell, but want to sell in order to alleviate the debt. You do not have short sale; you have a homeowner who is not happy with the current market conditions. The only option is for the homeowner to write a check at closing. You can show the homeowner how much they will end up paying and see if they have the resources or the fortitude to do so.
Remember: A short sale is not a way to get out of a mortgage. It is a tool for a borrower to use when they truly can't pay their mortgage.
Examples:
You have to determine how much a property will be short and what chance you have of getting a short sale approved. There are simple calculations you can use. In order to negotiate a short sale, you or your escrow company will be required to prepare a preliminary HUD-1 statement as follows:
Scenario 1: ONE MORTGAGE LIEN
Property details:
Client owes 1st trust deed $200,000
Minor lien:
Market Value:
Sale Calculation:
Sale price:
Commission:
Closing costs:
Lien payoff:
Net Sale Price:
Potential amount short:
% Short
In this case the short amount works out to be 9.75% of what the client owes. (Short amount divided by amount owed). This is a great example of a short sale that works if the client meets the other qualifications.
In another scenario with a lower sales price the home owner could be short 19.72% if the Net sale price was $160,563. This is also a good potential short sale. This is where knowledge of the mortgage companies is helpful. Lender (A) could take 19.72 % in a heartbeat while lender (B) may foreclose. Rules within mortgage companies are changing daily.
Scenario 2: TWO MORTGAGES, ONLY SECOND SHORT:
Property details:
Client owes:
Client owes 2nd mortgage: $60,000
Market value:
Sale calculation:
Sale price:
Commissions:
Closing costs:
Net sale price:
Potential amount short: ($39,437)
% Short
You will only be negotiating with the second lien holder. The first will be satisfied at closing. The Short amount divided by 2nd mortgage owed is at 65.73% short. Most lenders will accept this deal. If the property forecloses, they will most likely get nothing.
Scenario 3: TWO MORTGAGES, SHORT GREATER THAN SECOND BALANCE:
Property details:
Client owes 1st mortgage: $140,000
Client owes 2nd mortgage: $60,000
Market value:
Sale calculation:
Sale price:
Commissions:
Closing costs:
Net sale price:
Payoffs (estimated):
1st mortgage:
2nd mortgage:
Potential amount short:
1st mortgage:
2nd mortgage:
%Short
1st mortgage:
2nd mortgage:
This scenario is more common. The amount short exceeds the second mortgage balance therefore both will be short. In most cases the second will end up having to settle at very close to nothing. It is not uncommon for a large second to accept a payoff of $5,000 or less.
1. Commissions may vary. We can ask for 6% but ultimately it is up to the lender. The current standard rate is 5% however lenders have been more cooperative recently.
2. Closing costs will also vary in your area. This last example assumes that closing costs are set at 2.25% (including taxes).
3. The property should be the lowest priced comparable in the neighborhood and you may need to leave room to negotiate. In order to accommodate this we usually calculate the value of the property at 5% less than the price at which we think the house will sell.
PMI-Private Mortgage Insurance
This is a monthly fee charged to a borrower on loans that were originated at over 80% of the property value and insure a portion of the loan should your client default. It is usually set at a percentage of the total balance for example the top 20% of the loan may be covered. If your client owes $200,000 on a 100% mortgage, most likely the lender has PMI covering $40,000 (20% * $200,000 = $40,000). You can verify whether your client has PMI by taking a look at their mortgage statement. It will be shown as a line item. PMI does not apply to seconds as the lenders absorb the added risk through higher interest rates.
If your client has PMI and it is less than 20% short, you need to contact the lender to see if they will even consider a short sale. You should have your client make this call. Policies always change, so don't assume that what they told you once will hold true for the next file. They still have to foreclose and that carries a cost. Many of these PMI companies are at risk of becoming insolvent and going bankrupt. That is why it is suggested that you submit this to the bank for final approval.
Lender paid mortgage insurance - LPMI
There used to be 100% financing loans with no PMI. The reality is that the lender was paying the PMI and passing the cost to the borrower in the form of a higher interest rate. The issue is that you can't verify by looking at the mortgage statement whether PMI is in place or not.
INSIDE TIP FOR THE DAY:
Lenders are not accepting electronic signatures. To save yourself time at the end, get wet signatures up front.
LOTUS REALTY GROUP
PROFESSIONAL SHORT SALE NEGOTIATORS
At Lotus Realty GROUP, helping people ethically succeed is at the forefront of who we are