The key determinants of how long it will take include the number of mortgages & outstanding liens, delinquency/foreclosure status, other ongoing workouts, bankruptcy filings, servicing company backlog, negotiator workload, investor backlog, BPO agent backlog, BPO quality, homogeneity of neighborhood pricing, buyer offer strength, private mortgage insurance, etc.

To illustrate how a short sale approval can be as fast as 1-2 weeks to as slow as six or more month, I will provide two extreme examples below.  On average, the short sale deals that we manage takes 45-60 days from offer to approval.

Fast Example

The entire short sale approval took a little less than 2 weeks to obtain.  However, this is NOT typical in the short sale world…thus a dream deal.

Seller has only one mortgage with no private mortgage insurance, no other outstanding liens on the property, and no foreclosure sale date (allowed us ample time to market the property for the highest offer).  The mortgage is a conventional loan serviced by ABC and owned by a private investor.  The property is located in a neighborhood where pricing is within a tight band and the buyer presented a full market priced retail offer.

The short sale package got on file with the lender within 72hrs of fax submission.  There was no need to wait for the assignment of a negotiator as any loss mitigation representative working for ABC can render a decision on the spot, so long as it is within the investor’s guidelines.

The ABC representative decided that an BPO is not necessary for this deal and provided an counter offer to lower the Realtor’s commission by 1%.  The Realtors agreed to the reduction and the ABC representative promptly provided the written approval.

Slow Example

The entire short sale approval took more than 6 months to obtain.  Unfortunately, this is more common in the short sale world than the previous example…many heartaches and tough battles make this a nightmare deal.

Seller has two mortgages with private mortgage insurance, IRS and HOA liens on the property, and a foreclosure sale date less than 2 weeks away.  The first mortgage is a conventional loan serviced by DEF and owned by a government entity.  The second mortgage is serviced by GHI and owned by a private investor.  The property is located in a neighborhood where pricing varies dramatically and we only had the time to obtain a low ball offer due to the short fuse to the foreclosure sale.

The short sale package could not be faxed in to the first mortgage because the fax server is constantly overloaded.  We had to escalate the offer up multiple levels of management in order to postpone the sale date and allow time for a review.  We then Fedexed the short sale package and waited another month before the it was finally opened and scanned into the first mortgage lender ‘s system.  (During this long wait, we found out that there is an open loan mod file and had to work to get the loan mod file closed in order for a short sale file to be opened.)

It took another two weeks before a stage I negotiator was assigned to determine if all required supporting documentations are complete and to order a BPO.  Another week passed, before we heard from the BPO agent and scheduled the appointment.  It then took two more weeks before the BPO value got back on file with the lender.  Phase I complete.

Finally we are onto phase II.  Except the phase II negotiator is swampped and has more than 200 files on his desk.  It took three weeks to finally get in touch with him and only to find out that the BPO came in unreasonably high despite the listing agent attending the appointment to provide guidance.  (This is most likely a result of the wide variance of pricing in the neighborhood. ) Forcing us to dispute the validity of the first BPO by providing our own CMA, listing history, repair estimates, market statistics, etc.  It took two more weeks to finally got the negotiator convinced enough to order a second BPO, which took another three weeks to conduct and get the value back on file.

At this point, the phase II negotiator countered the buyer’s low ball offer for $10K more.  The buyer reluctantly agreed to the $10K and then the negotiator forwarded the file to the private mortgage insurance company for approval.  Two weeks later, we got word that the PMI company is only willing to pay $1,000 towards a $50K 2nd lien.   The phase II negotiator then had to forward the file onto the investor (a government entity) for his approval, which we received in writing three weeks later.

In the mean time, we approached the 2nd lien as soon as we got word from the PMI company on the $1,000 payoff in an effort to help expedite the process.  Unfortunately, the 2nd lien has charged off the loan as it is negative equity and has become more than 180 days delinquent.  So we no longer have the option to work with the loss mitigation department; we now have to deal with the recovery department where collection guidelines become much more aggressive and unreasonable.  They demanded 30% of $15,000 of balance in cash or no deal.  After much back and forth, we settled on 10% or $5,000 cash to the 2nd lien, whereby the $4,000 shortage had to be paid out of pocket by the seller.  Since the seller simply can not afford to do so and the buyer is not willing to pay the $4,000, the buyer then walked away from the contract.

As soon as the first mortgage became aware of the news, they prompty scheduled another auction date, which can only be postponed with a new offer.  So, we immediately notified the back-up buyer on the pre-negotiated deal and then submitted his package to the lenders.

Surprise, surprise!  Without consulting us, the seller filed bankruptcy right before we get the new short sale approval letters from both lenders…no good reason for the seller’s timing of the filing.  Unfortunately, the bankruptcy filing stops all short sale efforts and kicks the file: 1) out of the loss mitigation department into the bankruptcy department at the first mortgage, and 2) out of the regular recovery department into the bankruptcy recovery department at the second mortgage.  Which means attorney authorization letter are now needed and all new negotiator assignments are necessary, i.e. a long wait and bye-bye pre-negotiated terms!  Luckily, the new buyer was patient and waited out the extra two months for his approval.

However, the work does not stop here.  In order to go to settlement, we must get the IRS lien released and negotiate down the HOA lien (to meet minimum net payoff requirements by the first mortgage).  Luckily, we were able to accomplish both within the 30 days allowed by the lender from approval to settlement.  Otherwise, we would have to secure extensions from both lenders (not a guarantee at all).  Unable to obtain those extensions, would mean having to start all over with a third buyer!  Yikes!

Departing Thoughts

The long and short of this article is that a lot goes on in a typical short sale deal behind the scene that most agents, buyers, and sellers don’t see and don’t appreciate.  Even in the hands of a specialist, things can go off track unexpectely and cause delays and ruin a perfectly good deal.  Tacking on inexperience (avoidable mistakes), it is not surprising that nationwide short sale success is less than 15%!  It is vital that you seek out a trusted short sale specialist – our track record of success is in excess of 85%!

Does this ring true for you? If so, you might ask…what options do I have? Let me suggest a few:

1. One spouse takes over. One spouse gets the title and refinances the joint-mortgage to release the other spouse from further financial responsibility. Unfortunately, lenders are reluctant to refinance a joint-mortgage into one spouse’s name if he/she doesn’t qualify on his/her own. If the refinancing effort fails, then the other spouse remains on the hook (may be able to sue to enforce the divorce decree).

2. Business partnership. The couple keeps joint title and mortgage as is and tries refinancing or loan modification to reduce payment if necessary. One spouse lives in the property and pays a large portion of the mortgage while the other spouse contributes the remainder. Once the market rebounds, the property is then sold and the profit is split up. The issue here is the lack of finality for the divorce as both parties remains liable for the other’s actions for an unknown duration.

3. Renting to buy time. Both joint title and mortgage remains as is. As before, they try refinancing or loan modification to reduce payment if necessary. Then, rent out the property and apply rental income toward the mortgage. Make sure that you are not violating the mortgage by converting it into a rental and you meet the rental licensing requirements. The pros and cons in the second scenario apply here as well, with the added responsibility of being a landlord.

4. Pursue a short sale. If successfully done, a short sale allows homeowners with financial hardship (such as a divorce) to sell their property for less than what they owe, satisfy their mortgage, possibly eliminate deficiency judgment, and minimize credit damage, without paying realtor commissions. You’ll need to consult an accountant to understand potential tax liabilities as a result of debt cancellation. The issue here is that 90 percent of short sales fail nationally because most agents are completely unaware of what the lenders want. Choosing a competent professional is the key to this option.

5. Let it foreclose. Allow the property go into foreclosure and remain in the home for as long as possible and pocket the mortgage payments for the duration. The issue here is that the homeowners remain liable for the deficiency amount as a result of the foreclosure sale. For example, if you owe $150K and the property sold for $100K at the foreclosure sale, then you will remain liable for the short fall of $50K plus all legal fees involved. In some states, the lender has the right to garnish wages to recover the shortage. Not to mention that a foreclosure has the most devastating effect to a person’s credit rating and has the potential to hamper future employment opportunities.

6. File bankruptcy. Look into Bankruptcy and consult competent legal advice. In general, bankruptcy has devastating effect to a person’s credit rating. If one spouse files for bankruptcy, the other spouse may be affected. However, bankruptcy is worth pursuing under certain circumstances. For example, Chapter 13 lien stripping can potentially eliminate second and third mortgages on the property and Chapter 7 bankruptcy can potentially shake off unsecured debt while exempting the primary residence.

To wrap up, we are all aware that foreclosure has risen dramatically since 2007. Most people are aware that 50% of all marriages in the America end in divorce. Some people are aware that 25% of all residential properties with a mortgage nationwide are now underwater. But few people are aware that 7 out of 10 homeowners go into foreclosure without visible intervention! With your financial future on the line, please explore all your options and seek competent professional help.

The falling prices and improving home affordability (see chart below) combined with mortgage rates lingering at historic lows drove December’s sales increase.  According to Radar Logic, motivated sales rose 177% year-over-year from December 2007 while the sum of all other sales in the 25 metropolitan statistical areas fell by 17%.

To top it all off, the government has rolled out a $8,000 first time home buyer tax credit program for 2009.  At a glance:

For more details, click here.

To summarize: housing affordability is high, mortgage rates is low, short sale offers added discounts, and you get a $8,000 tax credit for 2009 purchases…need I say more?!

Recently, Fannie Mae released new guidelines (Announcement 08-16) for borrowers with bankruptcy, foreclosure or pre-foreclosure on their credit report to qualify for a home loan. While the initial announcement did not specifically address short sales, the subsequent FAQ released on August 13, 2008 did in questions 6 and 7, excerpted below.

Is a preforeclosure the same as a short sale?

No, not necessarily, although historically the terms have been used interchangeably. For Fannie Mae’s purposes, a preforeclosure assumes that the borrower has been delinquent in paying his or her mortgage and the servicer/investor agrees to accept a lesser amount to avoid the time and expense of a foreclosure action. A short-sale, however, can refer to situations in which the servicer/investor of the mortgage agrees to a payoff of a lesser amount than is actually owed, even on a current mortgage, to facilitate the sale of the property to a third party.

If a borrower has completed a short sale and was never delinquent on that mortgage and is now attempting to purchase a new primary residence, will Fannie Mae purchase the loan?

If the borrower is purchasing a new property and the previous mortgage history complies with our excessive prior mortgage delinquency policy and does not have one or more 60-, 90-, 120-, or 150-day delinquencies reported within the 12 months prior to the credit report date, the loan is eligible for delivery to Fannie Mae, provided the lender or servicer who completed the short sale has not entered into any agreement that obligates the borrower to repay any amounts associated with the short sale, including a deficiency judgment.

Attached file FMNA 0816 faqs contains the entire FAQ that was released on August 13, 2008.

In summary, as long as a homeowner has not been more than 30 days late within the last 12 months, and a Waiver of Deficiency Judgment has been negotiated with the lender or servicer, then the short sale homeowner can qualify for a Fannie Mae secured loan immediately.

The important thing to remember is that with any real estate transaction, you need a professional to provide objective guidance. As the article states, a short sale is a more complex real estate transaction; thus, both buyer and seller should seek out a specialist that can mitigate the issues addressed in the article. As a Certified Distressed Property Expert (CDPE) and Short Sale Specialist, I have the knowledge and understanding to address these issues and others to successfully conduct the short sale for you.

Use A Short Sale to Escape Foreclosure

–written by Tamara E. Holmes for Bankrate.com.

If you owe more than your house is worth and can’t afford your payments, you might be able to sell it for less than you owe — without having to pay the lender the difference.

If you can no longer make your mortgage payments and your home is now worth less than you owe on it, foreclosure may not be your only option.

A short sale, in real-estate terms, is a sale of a house in which the sale price is less than what the owner still owes on the mortgage. It is a procedure sometimes agreed to by lenders, who often would rather take a small loss than go through the lengthy and costly foreclosure process, in which the lender allows the sale of a home for less than it is worth and forgives the rest of the note.

While there are some significant negative consequences to a short sale, an ever-increasing number of properties are being advertised with that label.

Short sale: Win-win-win situation

The beauty of short sales is that they can be a win-win-win situation for seller, buyer and lender. Here’s how:

• The seller gets out of the mortgage liability without facing bankruptcy.

• The buyer gets the home at a reduced price.

• The lender agrees to a loss it considers minimal without going through a foreclosure and being saddled with an unsalable property.

While it may seem surprising that lenders would agree to accept less than what they are owed, they benefit from the process, too.

“The lender benefits by not having to go through the protracted process of foreclosing on the borrower and then having to put the property on the market and go through the whole marketing process,” says Stuart Wilson, a real-estate agent with Paragon Real Estate in San Francisco.

A market saturated with foreclosures can cost lenders billions — and as much as $50,000 per foreclosure — according to a study by the congressional Joint Economic Committee.

A buyer’s dream

For a buyer, a short sale is a boon since he or she is getting a property at a reduced price. However, the process of waiting for a lender to decide whether to agree to a short sale can make a lengthy home-buying process longer and more arduous.

Wilson, who has represented both buyers and sellers in short-sale deals, advises working with an agent who’s familiar with short sales.

He also suggests that buyers looking to negotiate a short-sale deal come armed with enough documentation to convince the lender that settling for the lower price is the best option.

“You’d better be armed with recent comparables that show unequivocally that the lender’s price is out of line,” says Wilson. “You can’t do this with a cover letter or a conversation. It will need to be done with the kind of documentation that an appraiser would come up with.

“When you go into a short sale, you have an institutional lender, and it is an anonymous entity,” Wilson continues. “You don’t get a chance to talk to these people, you don’t know what their guidelines are, you don’t know what their time frames are, and you don’t know if your contract will be approved in six weeks or six months. It’s a real crapshoot.”

Lenders are most concerned with the financial situations of the seller when they ultimately make their decisions. If a seller can handle the mortgage payment, there’s no motivation for the lender to let the seller out of the mortgage at a lower price.

“A lot of lenders aren’t even going to consider a short sale unless it seems like (the homeowner) is in financial distress,” says Natalie Lohrenz, director of counseling for Consumer Credit Counseling Service of Orange County in Santa Ana, Calif.

Also, if the home has a second mortgage with another institution, a short sale is less likely to be approved, since that second institution would have to agree to forfeit all or part of the money it’s owed.

Last gasp only

While getting a lender to agree to a short sale may seem like an answer to the prayers of a homeowner who wants to unload a house, it’s not a good move if you’re merely looking to find a new place. It’s generally a last-ditch effort when the only other option is foreclosure.

Should you go for a short sale? It depends on how deep a financial hole you’re in and how likely it is you’ll be able to overcome those financial difficulties.

“If they’re just having a short-term problem — short-term disability or maternity leave or layoffs, but they have good prospects to find something soon and they can weather the storm and hold on to the profit through that — obviously they wouldn’t want to think about a short sale,” says Lohrenz.

“But if the choice is foreclosure or short sale, generally a short sale is going to be a better idea.”

Before you think about asking your lender to consider a short sale, it would be a good idea to get your paperwork lined up.

Be ready to show the lender you are serious about your situation. Get together a hardship letter (an honest explanation of your financial situation and how it occurred), pay stubs, bank statements, tax returns, an appraisal and documentation of your debts.

3 critical safeguards

If you’re considering a short sale, experts advise you to take the following steps to meet potential negative consequences head-on.

1. Get it in writing. Make sure the lender agrees in writing that the short sale will absolve all debts.

“If they owe $300,000 on the house and the short sale is for $280,000, is there any possible way that the lender’s going to come after them for the $20,000?” Lohrenz says. “Most lenders will put that in the agreement that they’re not going to come after the deficiency.”

2. Protect your credit rating. Ask the lender how it will report the short sale on your credit report.

“Most of the time, a short sale shows simply that a debt is satisfied,” says Lohrenz. “But theoretically, a short sale could reflect on the credit report as ’settled for less than the full balance.’” Such a designation is a negative mark on your credit report, though it wouldn’t hurt your credit as much as a foreclosure would.

3. Get professional tax advice. Short sales often have tax repercussions, since lenders can claim the forgiven debt as income that they provided you.

That means if you agreed to a short sale for $50,000 less than what you owed the lender, the lender could issue you a 1099 for $50,000, which you would have to pay taxes on.

But there are two “outs,” says Lohrenz. “If you meet the IRS’ definition of insolvency at the time the debt was forgiven, then you generally don’t have to pay taxes on it.”

Or, if your home loan is a nonrecourse loan, you’re also likely to escape this tax. With a recourse loan, whoever signed the note is personally liable for the debt, and in a short sale, the debtor would have to pay tax on the difference. A nonrecourse debt is one secured by the loan collateral — such as the house itself — and the debtor would not have to pay tax on the sale shortfall.

The most common case is that mortgages secured by the property — especially for buyers who made a 20% or more down payment — is a nonrecourse loan. But it is absolutely critical you consult a tax attorney before you make such a move to ensure that you don’t dig a deeper financial hole as a result of the tax situation.