This is the second in a two-part series. Click here for part one.
When the value of a property falls so much that the home is worth less than the mortgage, it causes a quandary for both the bank and the borrower. A short sale — in which the bank agrees to accept less than the amount owed — addresses the problem and helps all parties involved. The bank gets something rather than nothing; the homeowner gets out from under the mortgage. Both avoid the expensive and time-consuming process of a foreclosure. But if you’re the buyer, there are some important steps you need to take before moving forward with a short sale offer.
When lenders evaluate a short sale request, one of the first things they review is the financial shape of the borrower. The borrower must prove financial distress; at a minimum, the borrower must be at least two or three payments behind. The lender will also review a borrower’s liquid assets to see if they could be used to pay the delinquent amount.
How does this affect you, the buyer? You need to remember that borrowers who are continuously late on their mortgage payments are also likely to defer maintenance on the home. Maybe the hot water heater doesn’t get so hot and needs replacing, but there’s no money to buy a new one. Shingles might be missing from the roof, or some electrical outlets might not work. While this can work to your advantage — you may not have as much competition for a home that needs some work — you also need to estimate how much those repairs are going to cost.
Homeowners who qualify for a short sale must provide a property disclosure form that highlights any known issues — and not just obvious problems but the not-so-obvious ones as well. Say that a pipe burst within a wall and briefly flooded the dining room. That must be disclosed. The seller should also indicate that there may be mold issues behind the walls due to the water damage, even if there’s no visible problem. Read the property disclosure form carefully.
With a short sale, you’re often able to inspect the property before the sale at an open house or by appointment. Take advantage of this opportunity. You may even want to hire a licensed home inspector to make a full report of all potential issues. At the very least, drive by.
A title report lists all current and previous owners as well as any other entity that has an existing legal interest in the property. Upon a successful offer, you’ll have time to examine the preliminary title report showing all current liens. A lien indicates a legal interest in the property that must be satisfied before the home can be transferred. A mortgage is a lien, for instance. But there are others. If a contractor performed any work on the home but hasn’t been paid, there may be a mechanic’s lien that can only be released when the contractor has been paid in full. Delinquent property taxes and federal and state income taxes may also be a problem.
An owner may have more than a second (or even third) mortgage, a home improvement loan or even a home equity line of credit. In a short sale, these liens will still need to be paid in full or otherwise resolved. The bank with the first mortgage may agree to a short sale, but the others may not.
A divorce can also be an issue. When couples split and the divorce decree is signed, the ex-spouse may remain on title. If so, the “ex” will have to deed the ownership back to the person living in the home before the home can be sold.
Before the housing debacle, many banks weren’t used to short sale requests and didn’t have properly trained staff to evaluate, approve and manage them. Today, short sales are much more common, and as more and more occur, the time it takes to process a short sale request has shrunk. When you approach the listing agent, ask if he or she is experienced dealing with short sales. (A real estate agent who has the “SFR” designation has been certified as a short sale and foreclosure specialist.)
The agent representing the seller should have experience working with a bank’s short sale department and be up to speed on what documentation the bank requires and the steps that need to be completed. Without the proper presentation, the short sale request could be bungled, delayed or perhaps declined solely because the agent and the owner did not follow the proper bank protocol.
When a bank first evaluates an offer, you want to make it as appealing as possible. That means the bank needs to be convinced of your ability to close on time. Along with your signed sales contract, you should include an approval letter from your lender. This letter should be on the lender’s letterhead along with your loan officer’s contact information, and it should highlight the amount for which you’re qualified, which just happens to be the very same as the short sale amount.
The letter should also state the items that your bank reviewed when issuing your approval. It doesn’t have to list how much money you make or how much you have in your bank account, but the letter should point out that your income, assets and credit have been evaluated and approved, and all that’s needed is a property address. The very one listed in the sales contract!
The pre-approval letter is still a key part of the short sale approval process if you’re the winning bidder, so make sure to get one from your lender before bidding. Then, you’ll be ready to bid on the home you want!
This information was originally published on Auction.com,
LLC, the nation’s leading online real estate marketplace. Founded in 2008, the company has sold nearly $20 billion in assets since 2010. Auction.com has more than 900 employees and offices in Irvine and Silicon Valley, California as well as offices in Atlanta, Austin, Denver, Miami and Newport Beach. Visit us at www.auction.com, or on Twitter, Facebook and LinkedIn.
