Short Sales……….Short This!
“A guide to sanity”
Written by
Kenneth Straley
Broker/Owner: Offsite Realty Inc
Table of Contents
Short Sales……….Short This!
“A guide to sanity”
Page 1
Table of Contents
Page 2
Introduction
Page 3
Short Sale Process – Diagramed
Pages 4 – 5
Selling a Short Sale
Page 6
Documentation Required by Lenders
Pages 7 – 8
Listing the Property
Pages 9 – 11
Negotiating the Short Sale
Pages 12 – 13 Odds and Ends
Page 14
Borrower Assistance Funds
Page 15
Credit Impacts & Repurchasing Times
Pages 16 – 20 Buying a Short Sale Property
Page 21
Conclusion
Page 22
References and Websites
1
Introduction
I’ve been doing short sales for over 8 years and I still see things that astonish me daily. I see people leave their
homes and just walk away because they are not informed of their options to short sale VS foreclosing. I see
people leave their homes after the Sheriff Sale because they do not know they have another 6 month
statutory redemption period. I see people leave their homes because they cannot refinance to lower their
payment. I see people leave their homes angry and pissed off because they feel abandoned by their lender
during tough times. I am here to tell you that short sales are the way out and can benefit everyone involved.
I have dealt with over 30 lenders and servicers all over the United States. I have done business with the
largest lenders to the smallest servicers and each one has their own set of rules, guidelines, paperwork and
timelines. I’ve done short sales on Residential, Commercial, and Land. Each short sale has an attitude, an
emotion, an appetite, a name, and a face; and all of them are memorable.
Short Sale Definition:
A short sale is a sale of real estate (residential, commercial, land), in which the proceeds from selling the
property will fall short of the amount owed on the property. The lien holders release the liens on the property
and settle for less than the amount owed at closing.
Quick Example:
A seller owes $350,000 on their primary residence. The seller loses their job and has no cash reserves to cover
their loss of income for many months. The seller chooses to do a short sale due to not being able to afford the
home any longer. The home is listed for $275,000 because that is the fair market value of the home as it’s
upside down. The seller’s lender accepts an offer for $275,000. The amount of loss for the lender is $75,000.
The lien on the property is released at closing by the lender. (Keep in mind this is a simple example).
This book will explain in detail the many intricacies, both positive and negative, that are involved in doing a
short sale. It will answer almost all your questions and can even act as a guide for doing a short sale. I will
give you background information and resources for further research and outline the process for both buyers
and sellers. I will give you my strategies to best maximize your time and efforts and therefore expediting the
process and increasing the possibility of lender/investor acceptance. It is important to keep in mind the short
sale process defers from being a seller of a short sale to being a buyer of a short sale. It is also important to
know there are risks involved for both buyers and sellers in a short sale transaction.
Risks:
Sellers: A seller is responsible for the overall short sale, timelines/deadlines, document collection, financial
risks, credit risks and tax consequences involved in selling the home.
Buyers: A buyer of a short sale is responsible for risks associated with potential loss of time and money prior
to the sale.
2
Short sale process - diagramed
Property is listed.
Offer is received.
Call/Inquiry is made to the lender(s)
48 hours after short sale package has
been sent to confirm receipt.
All of seller/buyer required
documentation and contract are sent
to lender(s).
File is put in line for accuracy review
by a processor, negotiator or team
member.
File is approved by the lender,
investor or mortgage insurance
company and an approval letter is
sent to the listing agent or broker.
A target closing date is set in
agreement with the approval letter
issued. All parties are notified.
Approval letter is given to all parties
of the transaction (seller, buyer, and
buyer’s agent, buyers Loan Officer,
seller’s closer, and buyer’s closer).
process.
Buyer’s title company and seller’s
title company begin their due
diligence on the file for title search,
payoffs, liens, Judgments, etc.
Property is cleared and closing may
commence. Once closed and funded
all parties will receive copies of the
closing documents for their records.
3
Selling a short sale
In 2007 George W. Bush enacted, through Congress, The Mortgage Forgiveness Act of 2007, which has now
been extended through December 31 2013 (copy found at www.IRS.gov search key word Mortgage
Forgiveness Act). The Mortgage Forgiveness Act gives debt relief to homeowners who sell their home for less
than the amount owed in the years 2007 – 2013. Investors of residential, land and commercial properties may
qualify for the Mortgage Forgiveness Act but should read the details carefully and consult a qualified
accountant or attorney before proceeding.
The Mortgage Forgiveness Act of 2007 generally allows homeowners/investors who have a legitimate
hardship to liquidate their home in their current market for a fair market value with relief given for the
discharge of debt. Examples of hardships may include:
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Loss of employment
Reduced income
- Underemployment
- Unemployment income
- No benefits at current job
Business failure
Property conditions
Loss of renter or rental income
Death/Illness of borrower or co-borrower
Divorce
Break-Up
Relocation for job
Military leave for service/orders
Mortgage default
Increase in Mortgage payment due to loan type
Increase in property taxes
Assessments
Judgments
While there are many more different types of hardships these seem to be the most common hardships for
short sales.
Things that do not constitute a legitimate hardship may be the following:
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Paid too much for the property
Neighbors are not nice
Pregnancy (unless under Doctor Orders or occupancy issues)
Unable to refinance (unless it’s to lower the monthly payment to meet monthly debt obligations)
The sale amount of the property depends on many things, which will be discussed in detail later in the book.
The type of loan involved also plays an important role in the sale i.e. Conventional (insured, uninsured), FHA,
DVA, Fannie Mae, Freddie Mac. A homeowner or investor may receive a 1099C from your lender for the
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amount of loss sustained stating the exact amount of debt incurred. Sometimes, the homeowner may not
receive a 1099C from their lender if all debt was forgiven or if the lender had Mortgage Insurance on the loan
to protect them from the loss. Many FHA insured loans have this procedure in place where the lender accepts
the loss and then turns in a claim to FHA for the loss. The homeowner then has an FHA insured claim on file
regarding their property.
Before proceeding it is important that we explain a few key terms that are very important for homeowners to
understand and know about.
Key Terms to KNOW:
Sheriff Sale:
The sheriff may or may not show himself at your doorstep to deliver a notice from your lender(s) stating they
are buying their property back. Many times it is a court appointed servicer or delivery agent. This date is
usually 6 months from date of foreclosure proceedings or 6 months from the first month of a delinquent
mortgage payment to your lender. You will be notified of the sale date within 6 weeks prior to the sheriff sale
date. BE AWARE OF THIS DATE.
Equitable Redemption Period:
This redemption period is the first 6 month period in which the homeowner may redeem the property by
paying all derogatory late fees and re-instating the loan to its current balance of principle and interest. After
this 6-month period the Sheriff Sale occurs and a Certificate of Redemption is issued to the lender. It is
important to check the state you live in to confirm the state does not have different redemption periods and
how they each apply.
Statutory Redemption Period:
This redemption period is the period in which the lender attempts to redeem the property through due
process of foreclosing on the property and changing the title to their name. This is a legal process, which
involves attorneys, courts, and legal fees. This process is also 6-months but may be shortened to a minimum of
5-weeks should the lender extend the Equitable Redemption period or put in place a forceforelcosure
proceeding for the property being neglected, vacant or abandoned. At this point in time you can still work
with the lender and their attorneys to redeem the property by paying the full balance owed, plus all legal fees
and any re-instatement fees. Also, the statutory redemption period on Reverse Mortgages is 12 months. It is
important to check the state you live in to confirm the state does not have different redemption periods and
how they each apply. During this period you may still reside in the property and continue with a short sale.
Example of Redemption Periods
Notice of 1st default
[
Jan1
Notice of Sheriff Sale Date
[X]
May 15
Sheriff’s Sale
Final Day of Redemption
[X]
July 1
(Equitable Redemption Period)
]
Dec 31
(Statutory Redemption Period)
5
Documentation required by lenders
While each lender has their own required paperwork that needs to be filled out prior to, during and after the
short sale occurs I am going to outline the general paperwork needed to start the process. It is important to
speak with your lender or qualified real estate professional about the proper documentation needed by your
lender. More important than receiving the required documentation from your lender is making sure the
documentation is filled out properly. If the documentation is not filled out properly the lender may reject it
and it may cause delays in the short sale timeline. Many lenders post the required documentation or
borrower hardship package on their websites for borrowers to view and download. If you are using an
attorney or professional short sale negotiation company they too may have their own list of criteria and
required documentation needed.
1. W-2’s for the previous two years. If you are self employed you also need previous two years federal
income tax returns – ALL PAGES. Self employed borrowers with a corporation and/or partnership will
also need corporate and/or partnership returns.
2. Most recent 2 month pay stubs. If you are paid monthly bring one stub, if you are paid every two weeks
bring two stubs, etc. Self employed borrowers must provide a year to date P&L or schedule K-1 for
current year. Also corporate and/or partnership YTD if applicable.
3. Bank or stock statements for all accounts encompassing the most recent 2 months.
4. Current mortgage statement. If you pay your mortgage online please provide a copy of the statement.
5. If you have rental income 12 months proof of rent and deposits will be required. Also, you will need a
schedule K-1 or documentation on tax returns.
6. Current utility bill for property being sold.
7. If collecting Unemployment/Disability, a benefit or reward statement is needed.
8. If collecting SSI, an approval and award letter is needed.
9. Copy of BK discharge papers if a bankruptcy took place.
10. Financial Information sheet filled out stating monthly debt.
11. Hardship letter filled out, signed and dated.
12. 2 years currents income tax returns (all pages).
13. Signed 4506T Request for Tax Transcripts.
14. RMA (Request for Mortgage Assistance) form.
15. Dodd-Frank form
16. Fannie Mae form 726
17. Freddie Mac form 710
18. RASS (request for approval of short sale)
19. Letter of Authorization signed and dated. Each lender has a letter so make sure you fill out the correct
one.
20. Copy of Divorce Decree if recently divorced.
21. Copy of Quit Claim Deed if someone was removed from title.
22. Copy of Judgments if liens are against the property.
23. Copy of contractor work orders/estimates if work is needed on the property.
24. Detailed pictures of work needed.
25. Listing contract with start dates and expiration dates.
26. Copy of HUD1 settlement with lender net amounts.
27. Copy of appraisal, CMA (comparable market analysis), BPO (broker price opinion)
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Listing the property
When listing your property for short sale it is very important that you work with a qualified Short Sale
Specialist or a CDPE (certified distressed property expert). Many real estate brokerages and offices have
CDPE’s and Short Sale Specialists that handle their short sale files on a full time basis. Due to the many
intricacies and large amount of paperwork and timelines involved a borrower cannot afford to waste valuable
listing time working with a real estate agent or broker who is not familiar with the short sale process or lender
requirements. As you can see from the required documentation list there is no room for error. If you are not
familiar with the real estate market in your area you can also request a list of qualified agents and brokers
from your lender as many agents and brokers are registered with specific lenders.
Terms to know
Lender: A lender can best be described as the company or institution providing the funds for the purchase of a
property.
Servicer: A servicer can best be described as the company or institution that collect the monthly payment and
service the homeowner’s loan.
Investor: An investor, when related to Mortgages, can best be described as the company or institution
providing security to the lender by backing the mortgage given to a homeowner by an insurance policy.
Confusing right?
Here is an example: John Smith gets a mortgage for his home from a local bank (Lender), the local bank then
sells the loan to another financial institution (Servicer). John Smith then writes the monthly payment to the
new bank as they are servicing the loan for the old bank. The new bank then gets Fannie Mae, Freddie Mac or
some other company (Investor) to insure the loan should it default. If a loan is never sold to a new bank then
the Servicer role will not be in place, only the Lender and Investor.
Setting the list price
When meeting with a qualified real estate agent or broker when you are ready to sell your property they will
more than likely do a CMA (comparative market analysis) , BPO (broker price opinion), or Appraisal to set the
listing price. If the investor working through the lender is Fannie Mae, Freddie Mac or FHA there may be a
listing price set by them after all documentation is received by the lender. Sometimes the lender may even
require a net amount and not care what the listing price is so long as the number is met at closing time. After
the net amount is given by the lender you can add all real estate costs on top of that and get a listing price.
Many times the lender or investor will reduce the listing price for the days on market based off a percentage.
Example would be the list price for first 30 days on market is $223,400, 60 days on market $209,500, 90 days
on market $188,000 etc.
7
Listing Contract
When filling out the listing contract make sure the property address, city, state, and zip code are filled out
correctly. If you are married or how multiple owners of the property all parties must be listed on the contract
and sign the listing contract. If the lender or investor requires cancellation or acceptance verbiage it is
important to have this typed on the contract for them. This verbiage is also in place to protect the
homeowner and lender. An example of the verbiage that may be required on the listing contract is: “seller
may cancel this contract at any time prior to the ending date without advance notice to the broker and
without payment of commission or any other considerations if the property is conveyed to the mortgage
insurer or mortgage holder. The sale completion is subject to approval by the mortgagee.”
Personal Property
I get asked all the time when doing short sales about personal property such as: lawn mowers, snow blowers,
TV’s, refrigerators, washers, dryers, microwaves, and window treatments. In Real Estate we have a term for
this stuff and it’s called “Chattel” which means personal property. In a short sale anything can be sold
separately by using a separate addendum or personal property agreement whereby the seller agrees to sell to
the buyer whatever is listed on it for a set amount or price. I do not recommend verbal agreements as it’s
always important to get everything in writing for personal and financial protection.
Required City Inspections
Depending on the City or State you live in it is important to find out if a City Inspection is required prior to the
listing of the property. Many times a City may have their type of inspection required or a person licensed with
the City may be required to do the inspection. This information can usually be found on the City website.
There is almost always a fee involved for this and the amount may vary from $150 - $550 depending on the
inspection type and the City in which the property is located. Examples of these types of inspections may be:
TISH Report (Truth in Sale of Housing)
POS (Point of Sale)
TOS (Time of Sale)
Depending on how the inspection goes the City may require a homeowner to have certain items fixed or
repaired within a set amount of time or they may require the buyer to have the repairs made within a set
amount of time. Make sure you know who is responsible for the repairs. Many times the lender will pay for
these required inspections and repairs if they notified in advance.
Timelines for Short Sale Approval
The timelines involved in a short sale vary greatly depending on which lender is involved and if there are any
special circumstances related to the loan. Typical timeframes for short sale approval should be 90 – 180 days
with qualified lenders once all documentation and required paperwork has been submitted. There are many
cases of 12 – 18 months for approval depending on the lender and special circumstances that may apply. It is
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important to remain patient, be positive, work diligently and continue to work with the lender and their
internal reps that handle the files. Much of the paperwork and documentation will need to be updated every
60 – 90 days should the file go past the 90 day mark. The lender has to keep the documentation current for
their investors and underwriters.
Utilities/Maintenance
If the property is occupied make sure all utilities are functioning. If the property is vacant or plans are made to
vacate the property you have 2 choices: you can leave all utilities on or shut all utilities off. There are multiple
companies that can be hired to have the property professionally winterized and preserved so as to not cause
damage by broken water pipes or gas leaks. The cost can vary based off the square footage of the property
and amount of work. General cost that I have seen is $250 - $750. The maintenance of the property can be
tedious for upkeep so it is important to stay on top of this. If the property is vacant it is important that the
driveway and lawn be maintained. If there is heavy tree cover then leaves may need to be cleaned up as well.
Many lenders are now requiring this for property preservation. There are also property preservation
companies that will manage the property for the homeowner if the property is vacant. There may be a
bundled fee or monthly fee involved.
The utilities may need to be turned on for the buyer’s inspection or appraisal so arrangements must be made
when the time comes.
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Negotiating the Short Sale
While there may be an art to negotiations, the art of short sale negotiations is no more than having everything
in order and knowing what you’re doing. Most lenders have a set amount they will take for the property and
set terms they have in place in order for the short sale to be processed. There are however short sale tactics
that must be used to protect the seller and get the best terms if repayment is necessary or if there are
required fees that need to be paid to offset seller’s costs in the transactions. Depending on the lender(s) or
investors and depending on the amount of loss sustained a seller may be required to pay for certain items
come closing time.
Closing Fees/Costs
When doing a short sale it is important to know that most fees incurred within a short sale can be paid by the
lender with advance notice. A lender will request a Preliminary HUD1 Settlement Statement from either the
listing agent/broker or title company. It is important that you work with an experienced title company that
has done short sales before. They must know what fees will go onto the Preliminary HUD1 Settlement
Statement and what fees cannot be placed on the HUD1. If the fees are not labeled correctly or properly
placed in the correct section on the HUD the HUD may be rejected causing substantial delay or even
cancellation of the short sale. Some of the fees that are covered by lender include the following:
Real estate commissions
HOA dues
Transfer taxes
Title services
Closing fees
State deed tax
Conservation fees
Property preservation fees
Negotiation fees
Appraisal / BPO fees
Jr. Lien payoffs
Judgment payoffs
Property taxes
Wire transfer
Delinquent utilities
County Recording fees
City Inspection fees
While this may not be all the fees that can be approved by lenders they are the fees that are generally
accepted and approved.
Seller Contribution of Funds
During a short sale process many things have to be considered. The lenders usually take a substantial loss on
the property. If there are multiple lenders or investors involved there could be more loss sustained.
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Many times a seller will be required to come to the transaction with their own funds. If the 1st mortgage
lender has no mortgage insurance on the loan then a seller may be required to either pay funds at closing or
sign a promissory note for a certain amount to cover the substantial loss. If the 2nd mortgage or Jr. Lien holder
does not agree to accept the amount given by a 1st mortgage lender or lien holder, then negotiations can be
made for a seller to contribute cash at closing or sign a promissory note. If there is a MI (mortgage insurance)
investor working with either the 1st or 2nd mortgage or lien holder the MI investor may also require the seller
to execute a promissory note or bring cash to the closing. Many of the promissory notes that are issued can
be interest free and usually for 5 years at a small monthly payment.
While this is never a good thing it can be advantageous for the listing agent or broker to negotiate a higher
purchase price by the buyer and therefore offset the cash contribution or promissory note required. This does
not always work but most time it does.
Jr. Liens/2nd mortgages, HELOC’ (home equity line of credit)
This part of a Short Sale can be the trickiest and most difficult. Prior to listing a property the listing agent or
broker should contact a Title Company to have an O&E (ownership and encumbrance) report pulled on the
property. This will allow you to find out what liens are against the property and for how much. Many
homeowners do not know the difference between a HELOC (home equity line of credit) and a 2nd mortgage. A
HELOC is a line of credit (open or closed) that is placed against the property by lien and generally after the
property was purchased. A 2nd mortgage is a Note against the property that was used to purchase the
property. Both must be paid and settled at closing.
The typical negotiation or amount given by the 1st lender or lien holder to satisfy a 2nd mortgage or Jr. Lien
debt is $3,000 or 10%. It is the responsibility of the homeowner or person doing the short sale negotiation to
make sure there is an Approval Letter or Demand Letter issued by the Jr. Lien holder or 2nd mortgage lender.
While there is not set amount a 2nd mortgage or Jr. Lien has to accept from the 1st lender or lien holder, many
times they get nothing if the property goes through the foreclosure process.
If the 2nd mortgage or Jr. Lien holder does not accept the payoff amount given by the 1st mortgage or lien
holder the property cannot be closed and will be forced into foreclosure. The 2nd mortgage or Jr. Lien holder
has a higher amount of risk should the property default, hence there is almost always a higher interest rate
involved when dealing with these types of liens.
Depending on the 2nd mortgage lender or lien holder, many times they will collect an insurance claim for the
loss of money in the transaction. If the 2nd mortgage or Jr. Lien holder is a private portfolio lender or investor,
many times they cannot settle for the amount offered by the 1st lender or lien holder. The general acceptance
for a private portfolio lender or investor is 70% – 80%. This makes the short sale negotiations difficult at this
point because you have to now find money to contribute to the transaction by either the seller or buyer. You
must make sure this is approved by the 1st mortgage lender or lien holder prior to making arrangements.
Many times neither the seller nor buyer is allowed to bring any money to the table to close the transaction,
which can make finding funds to settle all liens difficult.
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Seller Paid Closing Costs or Buyer Closing Costs
Buyer closing costs and seller paid closings costs are different. Buyer paid is paid by the buyer and seller paid
closings costs are paid by the seller. When referencing seller paid closing costs in a short sale it is important to
know this means the sellers lender is paying the closing costs in place of the seller. Depending on which type
of financing a buyer is choosing when purchasing a property depends on what amount the sellers lender will
pay for the buyers closing costs.
If a buyer is choosing FHA financing for their new loan a lender will almost always pay 3% seller paid closing
costs and even higher depending on the lender. The reason a lender will pay the 3% seller paid closing costs
on an FHA loan for a buyer is because the funds are part of the transaction and to pay for the buyers upfront
FHA MIP (mortgage insurance premium) required by their lender plus the additional amount of funds needed
to start their escrow.
If a buyer is choosing conventional financing and asking for seller paid closing costs the lender typically will
only pay 1% and many times they will not contribute at all. The reason a lender will generally only pay 1% is
because the fees incurred by a buyer for conventional financing is much less then for FHA and there is not
required FHA MIP (mortgage insurance premium). Also, there is option with conventional loans to escrow
taxes and homeowners insurance where an FHA loan requires the escrow of taxes and homeowners
insurance.
If a buyer is choosing DVA for their financing a lender will pay the Funding Fee plus 3% in seller paid closing
costs if needed for the buyer. The lender will pay this because it is part of the requirement for DVA financing
just like FHA financing.
On the HUD1 settlement statement there will be a debit to the seller’s lender for the closing cost and a credit
to the buyer. The seller paid closing cost credit will be marked as “seller paid closing cost to: John Smith” and
the amount will be listed. Remember the term seller is still referencing the lender but this is how it must be
listed on the HUD1 settlement statement.
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Odds & Ends
Judgments
I cannot tell you how many times during a short sale situation I have found there to be thousands of dollars in
Judgments that were not disclosed by anyone or know about. The creditors will put these Judgments in place
by court order for not paying a debt. The Judgments can be for medical, credit, debt, etc. and must be paid,
settled or negotiated prior to closing. Many times the lender will pay for these Judgments but must be
disclosed and negotiated prior to closing. A Release of Judgment must be provided at closing to the closing
officer. The Release of Judgment then has to be recorded with the County the property is located in to have
the Judgment removed from the property as a lien. There will be a cost of $46 - $65 per document recorded.
Divorce
The separation of a couple through divorce process is never good, but it does happen quite often. When it
does happen and there is a property at stake or a property is given to either party of the divorce, by will or by
force, it is important to keep all divorce documentation and make sure the divorce decree is executed
properly. Many times 1 person is removed from the Spousal Interest on the property thereby leaving only 1
person liable for all debt on the home. It is important that correct language and verbiage be used in the
Divorce Decree when removing a person from the debt obligation of the property and making sure the Divorce
Decree acts as a transfer or ownership at closing. If the Divorce Decree does not remove a person and their
rights and interests in the property, then a Quit Claim Deed will be needed to remove the other person and
their interest in the property. The lender or Title/Escrow Company will require a Certified Copy ($7 - $36)
prior to closing issued by the county in which the divorce took place.
Death of Borrower/Co-Borrower or Spouse
If there is a death of a spouse the lender and Title Company may require a copy of the death certificate as
proof of removing that person from Title and Mortgage. If you do not have a copy, a copy may be obtained
from the county and cost can vary from $14 - $32.
Property Taxes
Prior to closing the Title/Escrow Company will call the County or Township the property is located in and
confirm the amount of property taxes paid or owed on a property. Depending on how you pay the real estate
property taxes on a property depends on how they get paid at closing. If you escrow your taxes with the
lender the taxes will be paid up to the date of closing. If you do not escrow your property taxes and either pay
2 times a year or 1 time per year, the lender will more than likely pay the amount due at closing by way of proration.
Property Assessments (pending/levied/certified)
The same as property taxes, a Title/Escrow Company will also confirm with the City, County or Township if
there are any pending (upcoming), levied (due for collection) or certified (added to) assessments due on a
property. These must be paid at closing by the buyer or seller prior to transfer of ownership.
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Homeowner Association Dues
While I do not condone people not paying their Homeowner Associations Dues, it may actually help sellers
who are in a financial bind. Most lenders will pay up to 6 months and many times a few years worth of
delinquent association dues at time of closing. I have had up to 2 years of delinquent association dues paid by
lenders in the state of Minnesota. It is important to know there will be late fees incurred for not paying and
depending on what type of association the property is located in there may be additional legal penalties and
consequences incurred. It is always important to consult with your association before you make the choice to
not pay.
Homeowner Insurance
If you escrow for homeowner insurance with your lender and you stop paying your monthly mortgage
payment you will be in default of not only your Principle, Interest and Taxes but also your Insurance. Most
lenders require that you buy an annual insurance policy when you purchase your home, which gives them 12
months of protection on the property should you default. The monthly escrow ensures the lender will have
the funds to pay for the next year’s homeowner insurance policy when it comes due.
If you do not escrow monthly for your home owners insurance policy, which depends on the lender, you may
have to pay this policy annually. If you do pay annually the policy may be pro-rated at closing for the months
not used or rolled over to something else. It is important to contact your insurance company to make sure
you know which type of coverage you have.
If you do not pay your homeowner insurance policy monthly or annually, your lender may put a force
placement homeowner insurance policy on the property and pay for it with the proceeds from short sale.
Whichever type of payment method you have, it is always a great idea to contact your Insurance Company to
make sure the property is covered while going through the short sale process.
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Borrower Assistance Funds
HAFA, HIN, Graceful Exit, Relocation Assistance, Cash for Keys
There has been much discussion in regards to these funds and how a seller receives them. The amount of
assistance and type of assistance depends on the following: what lender a seller has, if the sheriff sale has
occurred yet, if the mortgage is Fannie Mae or Freddie Mac and the value of the property. For more
information visit www.MakingHomeAffordable.gov
HAFA: Home Affordable Foreclosure Alternative of $3,000 which is paid to the seller at closing.
HAFA Basic Eligibility: You may be eligible for a Home Affordable Foreclosure Alternatives (HAFA)
short sale if:
• Your first mortgage was originated on or before January 1, 2009
• Your first mortgage is past due or you believe that you will miss a
payment in the foreseeable future (loan can be current)
• The property is not condemned
• You have not been convicted within the last 10 years of felony larceny,
theft, fraud or forgery, money laundering or tax evasion, in connection
with a mortgage or real estate transaction
• The unpaid principal balance on the loan is no greater than the following:
1 Unit: $729,750
2 Units: $934,200
3 Units: $1,129,250
4 Units: $1,403,400
• Your first mortgage is not made to or secured by properties owned
by a corporation, partnership, limited liability company or other
business entities
HIN: Homeowner Incentive of $3,000 - $30,000 paid to the seller at closing. Only Bank of America pays this
incentive as of January 2013.
Graceful Exit/Relocation Assistance: $750 - $3,000 paid at closing to a seller.
Cash for Keys: Deed in Lieu with funds paid to seller for keys and deed to property being signed over to the
lender.
It is important for a homeowner to ask your lender for the specific details on each type of relocation
assistance program. Literature and details will be provided to you prior to closing as well as disclosures. Your
real estate agent or broker may be able to explain further on how these programs work and what stipulations
are applied. Many answers can be found at www.MakingHomeAffordable.gov or by searching your lenders
website.
**It is important to know the relocation assistance cannot be provided to the seller prior to the sale of the
home. These funds will only be provided to the seller of the property at a successful closing.**
15
Credit Impacts & Repurchasing Times
The main question I get asked daily in my business is what are the credit impacts of not paying my debt? I
have come to learn not to answer this question but rather refer this to an expert in the credit industry. Below
is a diagram I give my clients showing credit impact worst to least. While different circumstances can be
present in each person’s case I have found this diagram to be most helpful in understanding the negative
impacts of not paying debt. Should you have further questions about credit impacts, credit repair or have
general credit questions, please feel free to call, text or email my contact Melonie Ingvall at
Melonie.Ingvall@NeedCPR.com or 612-306-0459.
WORST
Foreclosure
Bankruptcy
Deed in Lieu / Cash for keys
Missed Credit Card Payment
LEAST
Short Sale
Repurchasing after a short sale
Under current FHA mortgage loan guidelines a seller who sells a home on short sale has to wait 2 - 3 years to
repurchase.
Under conventional mortgage loan guidelines I have seen sellers who have sold their home on short sale and
repurchase within 1 year and less than 3 years.
Under DVA mortgage loan guidelines it is currently 2 years unless special circumstances apply.
Many factors come into play when doing a short sale repurchase such as: Credit, Income, Job Status, Down
Payment, Date of Short Sale, Purpose of Short Sale, Debt to Income Ratios, and Assets for re-purchasing. It is
important to seek the qualified advice of a mortgage expert as the industry constantly changes each month
with new rules and guidelines.
16
Buying a short sale Property
When purchasing a short sale property it is important for a buyer to remember 3 things……BE PATIENT, BE
UNDERSTANDING and BE IMFORMED. The short sale process, as you read about, is very complicated, never
guaranteed and has emotions involved for all parties to the transaction. A seller may be forced to do a short
sale for many reasons, some good and some bad. It is important to know the process is very involved for the
seller and the seller’s agent or broker. Equally important is the buyers situation in a short sale because
without a buyer, there will be no sale. This section will explain the duties and tasks a buyer must do in order
to protect them, their interests and ensure a successful closing.
Choosing a Real Estate Agent or Broker
As Realtors, we now have acronyms for people that deal with distressed properties and short sales. The
acronyms are a CDPE (certified distressed property expert) and a SSS (short sale specialist). You can choose to
work with a normal real estate agent or broker in the transaction, but it is highly recommended to choose a
CDPE agent or Short Sale Specialist.
Finding/Choosing a property
When choosing the property that best fits you as the buyer there are many things to look for to make sure the
short sale is being conducted properly. As the buyer of a short sale it is imperative to ask questions, be aware,
and be informed. You do not want to waste your time on short sale properties that may never get approved.
These terms and information should be listed in the MLS agent remarks or additional supplements provided by
the listing agent for full disclosure to the buyer. Some terms to look for would be the following:
Professionally negotiated by attorney or agency
Agent is CDPE or Short Sale Specialist
All docs to lender
BPO/Appraisal complete
Cooperative seller
Pre approved short sale
FHA short sale
2 lenders or 1 lender
O&E report complete
All title work complete
Buyer pre approval
Now that you have found a property and are ready to submit a purchase contract it is important you obtain an
accurate pre approval letter to submit to the seller and seller’s lender. A short sale pre-approval letter is much
different than a traditional sale pre-approval letter. Many lenders now require the following information on a
short sale pre approval letter: Buyer name, buyer address, buyers date of birth, buyers phone number, buyers
social security number, pre-approval issuance date, pre approval expiration date, loan officers phone number,
loan officer email, buyers interest rate, loan amount, amount of seller paid closing costs and the financing type
(FHA, VA, Conventional etc.). Many lenders in a short sale are also starting to require a buyer financial
17
statement stating the job status, years on job, job title, salary or compensation, source of down payment,
assets applied to the loan, and many other personal questions. Do not be offended as this is becoming
standard operating procedure and to also make sure the buyer is well qualified to purchase the home before
they pay employees to start processing the short sale, which costs them time and money upfront.
Waiting for the short sale approval can be a daunting and boring wait. During this time the buyer must keep
their loan documents up to date with their lender. Keeping the financials current is what matters most. A
buyer must be ready to get their loan closed within 30 days so as to not cause any delay in the transaction
once the short sale approval has been issued. The final 30 days goes by quickly.
Purchase Contract
Once you find the property, arrange the financing and your agent or broker has gone through the short sale
process with you the next step is to put pen to paper and make the offer. In doing short sales for over 8 years
now, I have come to learn the proper way to present a purchase contract to the seller and sellers lender so as
to not cause any delay and increase the chances of the contract being accepted by all parties. The info below
shall serve as a general guideline for items that should be present in a short sale purchase contract.
Purchase Contract verbiage – It is important to have the correct verbiage in the contract to not only expedite
the process and protect the seller and lender but to also protect you as the buyer. The verbiage I have added
to all my purchase contracts is the following: “sale of property is subject to lender approval of terms and
conditions. Lender reserves the right to cancel the file at anytime should the file not meet approval
guidelines. Until an approval letter is received the contract is not fully accepted by seller’s lender/investor. If
a lender cancels this purchase contract no fees shall be paid to any party to this transaction.”
Expiration Dates – Unless the listing agent has been told to use specific dates in contracts submitted to the
lender most times the date’s section should be left blank or the verbiage of “30 – 45 days from lender
approval” should be used. Many lenders do not like exact dates entered into the contract because the dates
act as mini termination clauses.
Contingencies – This is the fun part of contracts and contract law. It is very important to make sure you have
many contingencies when doing a short sale as they can protect you from a bad transaction. Most purchase
contracts come with the following contingencies: Home inspection, Mold & Radon, Lead based paint,
Appraisal and Buyer financing. Many times, and depending on the knowledge of the agent or broker, more
contingencies can be added for the protection of the buyer.
Timelines – Any timelines that are used in a short sale purchase should be started from the date that “ALL”
short sale approval letters are received. The term “ALL” can be used if there is 1 lender or 2 lenders. Many
times there are multiple lenders and you do not want the time line to start if 1 short sale approval letter is
received prior to the other short sale approval letter. It is important to consider your options and purpose of
the timelines given in a purchase contract.
Home Inspections – Nowadays, it is not considered smart to purchase a property without getting a Home
Inspection done. Most Home Inspections start when all short sale approval letters have been received by the
18
buyer’s agent and buyer. My personal preference is to do the Home Inspection prior to receiving the short
sale approval as there can be additional room to negotiate price and repairs prior to final short sale approval.
Many home inspectors will provide an inspection report, which can be sent to the lender for valuation
purposes. A Home Inspection on a short sale purchase works differently than a Home Inspection on a
traditional sale in many ways. First, the lender often will not drop the price based on the condition of the
home as the lender is usually already aware of the condition and the list price should reflect repairs needed.
Second, most lenders do not do repairs to the property in short sales and the property is usually required to
be sold As/Is. Third, the Home Inspection should be used as a tool to provide mental comfort that the
property is in good condition. Having to wait 60 – 180 days to receive short sale approval to do an inspection
and find out the property is not in good condition and then have wasted that valuable time can be disturbing.
Valuation clause - Depending on the financing type you are choosing can depend on the valuation clause that
should be entered on the purchase contract. If you’re paying cash for the home, then no valuation clause
should be used. If you are doing FHA financing on the property you will have a default clause that states the
home must appraise for the purchase contract price or the buyer cannot obtain financing. If you are doing
Conventional financing the valuation clause is up to the buyer to choose. You do want to make sure you are
not locking yourself in to pay more for the home then the appraised value otherwise a buyer will be
responsible for providing additional cash at closing for the difference in purchase price and appraised value.
Financing - Depending on the type of financing a buyer chooses can depend on which type of financing
addendum a seller may require. FHA and Conventional financing types have their own addendums that
disclose the type of financing a buyer is choosing to the seller. The addendums disclose financing type,
interest rate, loan term, date of underwriting approval and if there is denial of financing penalties. The dates
chosen for buyer’s loan approval and underwriting should be chosen very carefully as this can lead to
automatic cancellation of a purchase contract by a seller or lender should the dates not be adhered to.
Appraisals – In this day and age an appraisal can mean the difference between getting a property and not
getting a property. Depending on the financing type that a buyer is choosing there may be value restrictions
and repair/condition requirements. It is very important that a buyer speak with their loan officer or mortgage
broker prior to ordering the appraisal. The 2 types of loan appraisals that I see most often are for FHA and
Conventional. Both appraisals types have their own property conditions that must be met in order for the
appraiser to sign off on the appraisal. Below is a description of each type of appraisal.
FHA Appraisals – FHA appraisals have strict appraisal guidelines and conditions that must be met in order for
the appraisal to be valid and accepted by FHA. If a buyer is having an FHA appraisal done and the appraisal
comes in lower than the purchase price the loan will not be granted and a buyer does not have an option to
bring additional cash to closing to cover the difference in value. A buyer’s loan officer or mortgage broker can
order a valuation dispute, but generally they do not work. Some of the FHA appraisal conditions can be roof,
plumbing, painting, mold, rotting wood, windows, doors, appliances, electrical and HVAC mechanicals. If
repairs are required in order for the appraiser to sign off on then an FHA appraisal re-inspection fee of $100 $350 will be charged to the buyer. If a buyer chooses to not proceed with the purchase contract due to value
or repairs it is important to know that as of current (2013) an FHA appraisal is valid on a property for up to 6
19
months and remains with the property even if the buyer does not close on that property. The next buyer will
be responsible for the appraisal value, conditions, and repairs if needed.
Conventional Appraisals - If a buyer is doing a conventional loan and the appraisal value comes in lower then
purchase price the buyer may have an option to bring additional cash to closing to cover the difference in
value. Conventional appraisals can overlook many repairs and property condition as the buyer has more stake
in the property and the loan is not insured by FHA.
Repairs – If repairs are needed to the property prior to closing for purpose of appraisal or buyers request the
seller and buyer must agree as to who pays for the repairs and who is to complete them. Make sure this
information is detailed and outlined so all parties understand what is needed. It is important to be detailed
and concise because all too often repairs are made and do not meet the requirements of either the buyer or
appraiser. If contractor bids are needed then it is important for a buyer or seller to get multiple bids and I
strongly advise a buyer to never use a contractor chosen by a seller and a seller to never use a contractor
chosen by a buyer. An unknown professional contractor by both buyer and seller is recommended.
Utilities – Many times a short sale is vacant and utilities have been shut off or the property has been
winterized. If a buyer is having an FHA appraisal done the utilities must be turned on for the appraisal. If a
buyer is choosing to have a Home Inspection it is recommended the utilities are turned on and water system
pressurized prior to the home inspection.
Utility Bills - Prior to closing on the property it is very important a buyer find out who the utility company is for
the property. This includes electric, water and gas. I put this responsibility on either the buyer or buyers
agent to call and confirm all utilities on the property have been paid and no outstanding amounts are due. All
too often a buyer closes on a property and then receives a bill from the water company or Gas/Electric
Company for hundreds of dollars as this was an oversight. This should not be an oversight.
Title Work - Prior to closing on a property a buyer will choose a Title Company to represent them in closing the
transaction. Many times title companies are so busy they have many over sights and do not do their job
correctly and rush to close with given deadlines and timelines. This is the most important part of a closing so
pay attention to details.
Property Taxes & Assessments - A good Title Company will check for delinquent taxes by doing a search and
calling the county to verify. It is important to double check this and make sure all assessments and taxes get
paid at closing.
Liens & Judgments – Prior to closing an O&E report will be ordered by the Title Company. An O&E (owners
and encumbrance) report shows the owner of the property, the number of loans and liens against the
property and if any outstanding Judgments are owed. This is very important to have completed prior to
closing.
Closing – When you make it to closing in a short sale situation you have done something that most have not.
Make sure you are ready and prepare yourself for anything and everything because it’s not over till it’s over.
20
Conclusion
I hope from reading this book you will now understand that short sales are not all negative but rather very
positive. Short sales are positive for sellers, buyers, banks, and the economy. Short sales prevent foreclosures
and negative credit reporting for sellers so they can repurchase a home in the future. Short sales allow buyers
to purchase a nicer property they otherwise may not be able to afford. Short sales allow lenders to liquidate
negative collateral debt obligations so new lenders can gain assets and profitability off their loss. Short sales
create market awareness in certain areas and allow real estate property sales to maintain a positive flow
without destroying prices in a given area or economy by selling them at market rate.
While this book is not meant to scare anyone or deter anyone from doing a short sale or purchasing a short
sale, it is however meant to inform everyone there is a lot of work and time involved in completing a short
sale. All parties to the transaction must work together to accomplish the same goal, which is getting the
property closed. It is the goal and duty of a buyer’s agent to maintain sanity and calmness on their end when
things get long and drawn out, while it’s the job and duty of the seller’s agent to get the file approved as
quickly as possible. Some lenders are becoming faster than others for providing short sale approvals with
their online servicing guides, while other lenders are still sitting in the dark ages with just a fax machine and
phone.
I have slowly learned it is with much diligence, teamwork and perseverance that a short sale can be
completed. Just don’t give up!
**Legal Disclaimer- It is strongly recommended that anyone thinking about a short sale or anyone with tax
related questions, seek legal advice and tax advice from a qualified attorney or tax professional.**
21
References & Websites
Credit Repair / Consulting
www.NeedCPR.com
Loan Programs & Guidelines
www.MakingHomeAffordable.gov
www.FannieMae.com
www.FreddiMac.com
Government Assistance Programs
www.Treasury.gov
Tax Related Questions
www.IRS.gov
Real Estate Info & Consulting
www.OffsiteRealty.com
Appraisal Info & Guidelines
www.FHFA.gov
22
Common questions : uncommon answers
Be informed. Be accountable.
Written by
Kenneth Straley
Broker/Owner: Offsite Realty Inc
Contents
COMMON QUESTIONS : UNCOMMON ANSWERS
Be informed. Be accountable.
Page 1
Introduction
Page 2
What is the difference between a Real Estate Agent and a Real Estate Broker?
Pages 3 - 4
What is Agency Representation?
Page 5
What is the difference between a Mortgage Broker, Loan Officer, and Retail Bank?
Pages 6 - 9
What are the current types of home financing options in today’s market?
Pages 10 - 12
What are these sale terms: Short Sale, PFS, REO, HUD, HBO/TS, FSBO, CD, RTO and
Corporate Owned?
Pages 13 – 14
Accepted contract..….now what?
Pages 15 – 17
What are your Pre-closing duties?
Pages 18 – 19
What are your Post-closing duties?
Page 20
Conclusion
Page 21
References/Websites
Introduction
It was a snowy eve in early February 2012. I had just returned from a trip to Florida for business and I was
sitting in my office getting things ready for the next morning. My phone rang, I answered, and it was a person
calling me to ask me about his current loan on his house for a potential refinance. After the usual greetings
and hello’s we got down to business and the person asked me “how do I know if I’m paying mortgage
insurance or not on my house because I want a lower payment?” I explained to this person that first of all you
do not pay Mortgage Insurance on your house; mortgage insurance is loan related. The person said
“OH!!!!!!!! I thought that since it was insurance it was related to my house in some way.” I asked him what
type of loan he had and when he purchased his home. He responded with “I don’t know what type of loan I
have and I bought my house 2 years ago (in July 2010)” and proceeded to ask where to look to find out what
loan type he has? I told him his mortgage broker or loan officer should have gone over this info with him at
his closing and he stated the “guy” that gave him the loan was not in business anymore and found my website
as he lived in the same city as I did. Together, he and I resolved his misunderstanding and found his loan type
(FHA), interest rate and monthly Mortgage Insurance payment all on his monthly mortgage statement (which
he never looked at due to bi-monthly auto-withdrawal).
It was after this conversation that I knew I had to do something to help people become informed and
accountable for their decisions made in this industry because the professionals that helped them in the past
may not be around in the future. The next morning I put aside all appointments and phone calls and started
to think about what it was about that conversation that deeply bothered me so much that I could not sleep
the whole night. My mind was racing with ideas and thoughts. Was it the fact that this person did not know
what type of loan they had? Was it the fact they thought Mortgage Insurance was an insurance policy on their
house? Maybe it was the fact that this person needed help and didn’t know where to look for answers that
late at night? I soon realized it was a culmination of all these questions that disturbed me and sparked an
internal motivation to inform others. So it was on that chilly February morning in 2012 I realized that I need to
start informing people about this industry so they can be informed, be accountable and make qualified
decisions. Therefore, my “Be Informed” campaign was launched and will consist of monthly topical
newsletters to all my past, current and future clients. It would also consist of 3 books that I want to write,
which are: Common questions: Uncommon answers: Be informed. Be accountable, Short Sales- Short This,
and Loan Modifications- boy they’re tough!!!.
After reading this book I hope people will have gained a better understanding of the real estate process and its
intricacies from start to finish. While much of this information is general knowledge to many people, it will be
new to some people and a refresher to those who have forgotten.
PLEASE ENJOY.
1
What is the difference between a Real Estate Agent and a Real Estate Broker?
The role and duties of a Real Estate Agent and a Real Estate Broker are viewed differently by our governing
state authorities as you will soon read below. My personal explanation to people between the differences of a
Real Estate Broker and a Real Estate Agent has always been, “It’s like the difference between a Nurse and
Surgeon.” Both are vital in the caring of patients but serve different purposes within a hospital.
A Real Estate Broker quickly defined is: Any person who for another and receives a commission, fee, or other
valuable consideration, lists, sells, exchanges, buys, rents, manages OR offers to negotiate a sale, option,
exchange, purchase or rental of an interest or estate in real estate OR advertises as engaged in these activities.
A Real Estate Agent quickly defined is: Anyone person who acts on behalf of the Real Estate Broker in
performing any act authorized by the broker.
Sounds complicated right? I will break it down even further so there is a valid understanding of the
relationship between a Real Estate Agent and a Real Estate Broker and who represents the client in a real
estate transaction.
Example: You want to buy a house. You call your local real estate company ABC Realty Inc and tell them you
need a Real Estate Agent. They send someone out to meet you. You like this person very much. You hire
them to go to work for you on finding a home or selling your home. Or at least that is what you think…right?
Wrong. You are hiring the Real Estate Broker of ABC Realty Inc to represent you. The Real Estate Agent works
for the Real Estate Broker of ABC Realty Inc. The Real Estate Broker owns or has ownership interest in ABC
Realty Inc. The Real Estate Broker is actually the person you are hiring, the Real Estate Agent acts on behalf of
ABC Realty Inc and the Real Estate Broker in representing you throughout your real estate transaction. I have
designed a diagram below to break this relationship down even further.
ABC Realty Inc
Real Estate Broker
Real Estate Agent
Buyer / Seller
By agreeing to hire a Real Estate Agent or Real Estate Broker to represent you on the purchase or sale of a
home or property a term called “Agency Representation” now becomes vital in the real estate transaction.
2
What is Agency Representation?
Once you hire a Real Estate Agent or Real Estate Broker to represent you throughout your real estate
transaction you will have to make a choice on which form or representation you would like. The decision you
make could affect the sale and outcome of the real estate transaction and your enjoyment of the property. I
have also designed diagrams for better understanding of the Agency Relationships within a real estate
transaction.
Seller’s Broker: A broker who lists a property or a salesperson that is licensed to the listing broker represents
the Seller and acts on behalf of the seller. A Seller’s broker or agent owes to the Seller the fiduciary duties
described on page 6.
Listing Broker/Agent
Seller
Subagent: A broker or agent who is working with a Buyer but represents the Seller is Sub-Agency. In this case,
the Buyer is the broker’s customer and is not represented by that broker. If a broker or agent working with
the Buyer as a customer is representing the Seller, he or she must act in the Sellers best interest and must tell
the Seller any information that is disclosed to him or her by the buyer. The Buyer will not be represented and
will not receive advice or counsel from the broker or agent. It is not until the Agency Relationship switches to
Dual Agency that a buyer will then receive advice or counsel from the broker or agent and can then be
represented. See the diagram for Dual Agency to compare.
Listing Broker/Agent
Seller
(Sub-agency)
Buyer
Buyer’s Broker: A Buyer may enter into an agreement for the broker or agent to represent and act on behalf
of the Buyer. The broker may represent the Buyer only, and not the Seller, even if he or she is being paid in
whole or in part by the Seller. A Buyer’s broker owes to the buyer the fiduciary duties described on page 6.
Buyers Broker/Agent
Buyer
3
Dual Agency: Dual agency occurs when one broker or agent represents both parties to a transaction, or when
two agents licensed to the same broker each represent a party to the transaction. Dual agency requires the
informed consent of all parties, and means that the broker and agent owe the same fiduciary duties to the
Seller and Buyer. This role limits the level of representation the broker or agent can provide, and prohibits
them from acting exclusively for either party. See the fiduciary duties below that are owed to all parties.
Listing Broker/Agent
Buyers Broker/Agent
Seller
Buyer
Facilitator: A broker or agent who performs services for a Buyer, a Seller or both but does not represent
either in fiduciary capacity as a Buyers Broker, Sellers Broker or Dual Agent is a facilitator. Confidentiality is
the only fiduciary duty owed to a Buyer or Seller during a Facilitator contract unless otherwise included in
writing in the contract. This form of Agency Representation is generally used when an agent or broker is hired
to do paperwork only for a real estate transaction.
Broker/Agent
Buyer
Seller
Fiduciary Duties:
Loyalty – broker/agent will act only in the client(s) best interest.
Obedience – broker/agent will carry out all client(s) lawful instructions.
Disclosure – broker/agent will disclose to client(s) all material facts of which broker/agent has knowledge
which might reasonably affect the client(s) use and enjoyment of the property.
Confidentiality – broker/agent will keep client(s) confidences unless required by law to disclose specific
information (such as disclosure of material facts to Buyers).
Reasonable Care – broker/agent will use reasonable care in performing duties as an agent.
Accounting – broker/agent will account to the client(s) for all client(s) money and property received as agent.
4
What is the difference between a Mortgage Broker, Loan Officer, and Retail Lender?
There are many avenues in obtaining money for the purpose of purchasing real estate in the United States. I
will now discuss the most common options available to the general consumer in today’s market. It is
important to understand there are many options available for obtaining money and loans, but the choice is
usually based off personal preference or previous relationships.
Mortgage Brokers: An MB acts as an intermediary who brokers mortgage loans on behalf of individuals,
businesses and financial institutions.
Loan Officer: LO’s generally work for banks and other financial institutions and approve loans to individuals
and businesses. Loan officers specialize in commercial, consumer and mortgage loans.
Retail Banking: RB’s generally do banking and execute transactions directly with consumers, rather than
corporations or other banks.
What is the difference between a Mortgage Broker and a Loan Officer?
A mortgage broker works as a conduit between the buyer and the lender and a loan officer typically works
directly for the lender. Most states require the mortgage broker to be licensed. States regulate lending
practice and licensing, but the rules vary state by state. Most states have a license for those who wish to be a
"Broker Associate", a "Brokerage Business", or a "Direct Lender".
A mortgage broker is normally registered with the state, and personally liable (punishable by revocation or
prison) for fraud for the life of a loan. A loan officer works under the umbrella license of their current
institution, typically a bank or direct lender. Both positions have legal, moral, and professional responsibilities
as well as liabilities to prevent fraud and fully disclose loan terms to both consumers and lenders.
Additionally, agents of mortgage brokers may refer to themselves as "loan officers".
Mortgage brokers must be licensed through the new Nationwide Mortgage Licensing System and Registry
(NMLS), pass the State and Federal licensing exam and FBI background check and take their 8 hour SAFE
continuing education each year. The goal of the Nationwide Mortgage Licensing System is to “employ the
benefits of local, state-based financial services regulation on a nationwide platform that provides for improved
coordination and information sharing among regulators, increased efficiencies for industry, and enhanced
consumer protection.” Visit www.mortgage.nationwidelicensingsystem.org to learn more of what the NMLS
has to offer and check out consumer updates.
Please remember to do a thorough background check prior to establishing any relationship with a mortgage
professional. This can be done through your state commerce website or through the NMLS website.
Side Note: As of 2012 Loan officers that work for a direct lender are required to be registered with the NMLS,
but not licensed.
5
What are the current types of financing options in today’s market?
You just met with a Mortgage Broker or Loan Officer and all you know is you’re approved for a loan.
Woohoo….that’s awesome. You rush home and go online to search for properties, barely able to type as
you’re so excited. You find your dream home on the first search and it’s absolutely perfect. It’s even your
favorite color and close to work, and wait, it’s even in your desired neighborhood. It can’t get any better than
this. Oh the excitement, the joy, and the suspense….wow it’s overwhelming. But, wait; I might not have
enough money for a down payment on this home. But, wait; I don’t even know how financing works and my
mortgage broker or loan officer only told me that I am qualified up to $X amount of dollars. Now what do you
do????? Read below.
Here are the current and most popular types of financing in today’s market:
FHA 203B: This is a standard FHA insured loan where the buyer pays a down payment of 3.5% of the total
home sale price. Example: Sale price $100,000, buyer down payment amount $3,500, amount of new loan
financed $96,500. The lender will then allow 96.5% of the home sale price to be financed. With the minimal
down payment this type of financing allows the buyer to keep more cash in their bank account. By having a
minimal down payment and less skin in the game there needs to be mortgage insurance on this loan. FHA
(Federal Housing Association) insures the loan issued by a lender in case of default. Also, FHA does not give
loans, they only insure loans.
FHA 203K: This is a rehabilitation loan for properties that need to be rehabbed prior to the homeowner
moving into the property. All work must be done by licensed contractors. There is still a required 3.5% down
payment and the lender finances 96.5% of the home sale price plus repairs into the loan amount. Example:
Sale price $100,000, repair amount need $10,000, 203K loan amount $110,000, buyer down payment amount
$3,850.
FHA 251: This loan is a 1 year ARM (adjustable rate mortgage) under the Federal Housing Administration.
This means the loan adjusts yearly at the current interest rate given by the bank or broker and adjustable
every year thereafter for the remaining life of the loan. It is designed to keep both the interest rate and
payment low but adjust throughout the life of the loan. Be careful when choosing this type of financing as the
monthly payment can adjust throughout the life of the loan for the better and for the worse.
FHA Loan Disclosure: If you’re obtaining an FHA loan to purchase a property that has an HOA (home owners
association) be sure to first check with the association to confirm they are FHA approved and they have a
current FHA certificate. Not all associations allow FHA financing due in large part to FHA certificates,
percentage of renters VS owners, and amount of foreclosures within a complex. Approved associations and
developments can be found at www.HUD.gov under FHA/HUD approved condominium projects. Remember
that FHA insures the lender that gives the loan, they do not give loans. As of 2012 FHA insured loans are only
for single family or 1- 4 unit homes with 1 unit owner occupied. Under the current FHA guidelines all FHA
insured loans MUST be assumable by future borrowers. FHA financing also requires a 1 year up-front PMI
(private mortgage insurance) policy that is 1.75% of the total amount of loan financed. Depending on the LTV
(loan to value) ratio the lender may also require the PMI to be paid monthly in addition to the yearly PMI fee
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due at closing. The monthly PMI is based off the sale price minus down payment and multiplied by .005% and
divided over a 12 month period. Example: $100,000 sale price – required 3.5% down payment = $96,500 loan
amount x 0.005% = $482.50 / 12 months = $40.21/month. You can use this example to estimate monthly PMI
by plugging in different values. The 1 year up-front PMI fee covers the lender should the borrower default on
the property at anytime throughout the life of the loan for up to 1 year. The reason for PMI is simple. Since
the borrower is obtaining a loan with a down payment that is less than 20% the risk of borrower default is
greater than if the down payment exceed the 20% amount. Once the borrower has 20% equity or 80% LTV
the borrower may contact the lender to request the PMI be removed at the lenders discretion. The PMI is
automatically cancelled when the loan reaches 78% of its original loan amount. The amount of PMI varies on
the size of the loan amount so be sure to find out this amount ahead of time from your mortgage professional.
Also, each county across America has FHA maximum loan limits. These loan limits are set by the Federal
Housing Association and can be found at www.FHA.com or www.HUD.gov. These loan limits change
periodically so be sure to check the website regularly before you view properties in the county you are looking
in. While checking these websites make sure to check the current maximum FHA seller paid closing cost
amount as well. As of June 1, 2012 the maximum seller paid closing cost amount is still 6%. The 6% seller paid
closing costs can be used for pre-paid’s, discount points and closing fees. The 6% seller paid closing costs
allows the buyer to only have to come up with 3.5% down payment and have all your additional fees covered.
The 6% seller paid closing costs can either be paid out of the sale price amount or added to the sale price
amount to cover the additional costs. When adding closing costs to the loan it raises the APR (annual
percentage rate) amount from what your current interest rate is to a higher interest rate as you will be paying
interest on the closing cost amount over the life of the loan. It can take the interest rate from 4% to 4.25% so
be sure to check this amount on the Truth in Lending disclosure provided to you by your mortgage
professional. The amount of additional fees varies with the size of each loan amount so be sure to ask your
mortgage professional what additional fees are included for the loan so you are prepared when you write your
purchase contract.
The 3.5% down payment or closing cost amounts may be borrowed from a family member with and used as
Gift Funds in the transaction. The family member must be an immediate family member and proof must be
provided to your Mortgage Broker or Loan Officer. A Gift Funds disclosure will need to be filled out as well as
proof of money being gifted.
Side Note: Since the Seller paid closing costs are an additional item requested by the buyer from the seller
this is something the seller has to accept. Most of the time when doing an FHA loan the seller is willing to
work with the buyer on the closing costs to make the transaction work.
Conventional Insured: This loan is a conventional loan with lender insurance on it. Generally these loans have
a less than 20% down payment and therefore require a lender paid monthly insurance fee for risk of borrower
default. There are many conventional loan programs out there now that only require 5% - 15% down payment
for a conventional loan. Just like FHA loans, these loans may require an up-front MI (mortgage insurance) fee
because the minimal down payment and risk of default is higher. The MI can either be paid up-front or
financed into the monthly interest rates. Be sure to ask your mortgage professional what the best option is.
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Conventional Uninsured: This loan is a standard conventional loan. A standard conventional loan is 20%
down payment with 80% financing. With the higher down payment there is less risk of default so there would
be no MI or PMI needed in this type of financing. As a general rule of thumb, the higher the risk of default the
more additional insurance is required.
ARM’s: Adjustable Rate Mortgages also know as Variable Rate Mortgages cover a broad range of mortgages
that are still available today. The general concept of the loan program is that it’s fixed for a set amount of
time with the ability for the mortgage to change based off a MI (market index). The MI can be tied to many
different MI’s that are available today. It is important when considering this loan to know which MI the loan is
tied to as this can have a dramatic affect on loan payment and term. The most common types of ARM’s are
Hybrid ARM’s, Option ARM’s, 3 -1 ARM, 5 -1 ARM, 7 -1 ARM.
I/O: Interest Only Loans are exactly what they state they are. The consumer is charged interest only on the
principle amount for a set amount of time with the option to pay the loan in full, refinance, or continue paying
interest only on the principle amount at the end of the loans term.
DVA/VA: DVA and VA are the same acronym for Department of Veteran Affairs. The DVA does not give loans
but rather guarantees their loans to Veterans. Like FHA, the maximum loan amount can change periodically
county by county and year by year. As of January 1, 2012 the DVA maximum loan amount is $625,500. Unlike
FHA, a VA loan does not require a down payment from the Veteran. The VA loan allows up to 103.15%
financing without PMI and also allows a 2nd mortgage up to 20% of the sale price and up to $6,000 for energy
efficient improvements.
A VA funding fee of 0 – 3.15% of the loan amount is paid to the DVA. This fee may be financed into the loan or
paid for by the seller as long as the closing costs on the loan do not exceed 6% of the total sale price of the
home. The qualifying limits for the loan amount are based on 41% of gross monthly income VS on a
conforming loan it is 28%. For a VA Refinance the borrower may borrow up to 90% of reasonable value of the
property. If a VA borrower refinances using a VA loan, the borrower may borrow up to 100.5% of the total
loan amount. The 0.5% is a funding fee to the VA for their IRRR (Interest Rate Reduction Refinance). For more
facts and info on DVA/VA loans visit www.DVA.gov.
Reverse Mortgage: A reverse mortgage is a form of equity release for a property that is paid off. It is a loan
available to seniors aged 62 or older. It enables eligible homeowners to access a portion of their equity based
off the loan to value ratios and appraised amounts. The homeowners can draw the mortgage principal in a
lump sum, by receiving monthly payments over a specified term or over their lifetimes, as a revolving line of
credit, or a combination of both. The monthly payments continue for the life of the homeowner or until they
go into an aged care facility. For more info and disclosures visit www.HUD.gov as the site if very useful.
USDA/Rural Development: YES, the USDA gives and insures loans….pretty cool right. It’s not just for farmers.
A USDA loan or Rural Development Loan is a government insured home loan that allows 100% financing on a
property that is in a USDA approved area. No down payment is required and closing costs can be paid by the
seller of financed into the loan amount. The loans are fixed rate, 30 year terms loans. Unlike FHA,
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Conventional or DVA loans, a USDA loan has to be given in a designated USDA rural area. For more info visit
www.rurdev.USDA.gov for income restrictions, loan guidelines and USDA approved areas.
Home Path Mortgage: Allows a borrower to purchase a Fannie Mae-owned property with a low down
payment, flexible mortgage terms, no lender-requested appraisal and no mortgage insurance. Expanded
seller contributions to closing costs are allowed.
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Low down payment and flexible mortgage terms (fixed–rate, adjustable rate, or interest–only).
Down payment (at least 3 percent) can be funded by the borrower’s own savings; a gift; a grant; or a
loan from a nonprofit organization, state or local government, or employer.
No lender-requested appraisal.
No mortgage insurance; ask your lender for cost details on loans without mortgage insurance.
Expanded seller contributions for closing costs allowed.
Available for primary residences, second homes and investment properties.
Many condo project requirements are waived; ask your lender for details
HOMEPATH Renovation Mortgage: Allows a borrower to purchase a property that requires light to moderate
renovation. The one loan amount includes both the funds for the purchase and renovation - up to 35% of the
as completed value, no more than $35,000. This is similar to a FHA 203K loan.
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Low down payment and flexible mortgage terms (fixed- rate or adjustable-rate).
Down payment (at least 3 percent) can be funded by the borrower’s own savings; a gift; a grant; or a
loan from a nonprofit organization, state or local government, or employer.
Renovation amount based on appraisal “as completed” value.
No mortgage insurance; ask your lender for cost details on loans without mortgage insurance.
Expanded seller contributions for closing costs allowed.
Available for primary residences, second homes, and investment properties.
Many condo project requirements are waived; ask your lender for details.
For more information on the HOMEPATH Mortgage types contact a Home Path lender or visit
www.HomePath.com for more details.
Financing overview: As you are now aware there are many different loan programs that are designed to
benefit many different types of people and the stages of life they are in. There are also many different facets
to the mortgage lending business and not all of them can be covered in this brief synopsis, which is why it is
very important that borrowers think into the future and do a current financial assessment before considering
the type of loan they are interested in. All too many times I see borrowers jump into a decision based off
current financial status or payment amount and never assess future financial options before making a
decision. There are many professional sites to visit and also mortgage professionals that are willing to help a
borrower make their financial decision and weigh their options accordingly. Financial planners and tax
professionals are also great resources to tap when contemplating which loan is the right loan for you.
Remember to do your research and think before you decide on which loan type or program you choose. The
decision can dramatically affect the outcome of current equity, future equity, and future salability of the
property.
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What are these sale terms: Short Sale, PFS, REO, HUD, HBO, CD, RTO and Corp. Owned?
PFS: Pre-Foreclosure Sale. A Pre-foreclosure sale is generally an approved sale by a seller’s lender in which
they have agreed to price, terms and conditions of the sale. These properties have a disclosed time frame
from date of offer and is usually accepted within 10 - 30 days after receipt of offer pending seller and listing
broker/agent have done all preliminary work required by the lender/investor. If this work has not been
completed the sale time frame will be significantly drawn out. Under the HAFA guidelines (Home Affordable
Foreclosure Alternative) incentive A.K.A (Graceful Exit Plan, Relocation Assistance, Dignified Transition) the
seller can receive up $3,000 - $30,000. The review process for this incentive can take up to 30 calendar days
and has to be completed and accepted prior to the sale approval.
Short Sale: This type of sale is exactly what it says. The seller’s lender/investor agrees to take a loss equal to
the comparable sales for the property within a 1 square mile radius. Unlike A PFS, a short sale does not have a
pre-determined sale price or terms and conditions that have already been approved.
The amount that a short sale property can be sold at depends on many factors:
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Price of comparables in the area.
Amount currently owed on the property.
Length of time the property has been on the market. A general rule of thumb I use is 98% offer
amount for first 30 days on market, 94% for 30 – 60 days on market, 89% for 60 – 90 days on market,
82% for 90 – 120 days on market and 75% for 120 – 150 days on market. Keep in mind this is a general
reference but seems to always work on the sales I have performed. A good check point for this is to
find out what the average price/sq/ft in your area is by using resource sites such as Zillow, House
Values or calling your local real estate company.
Whether or not the seller’s lender has MI (mortgage insurance) on the property.
Does the property have additional liens/encumbrances/assessments on the property that need to be
satisfied in order to close on the property?
Are there any outstanding Judgments against the seller or tax liens against the property that need to
be satisfied prior to closing?
Is the property an investment property with tenants currently occupying the property? If so, they may
be entitled to moving fees or relocation expenses prior to closing.
All these factors and many more affect the short sale process. It is extremely important that a buyer and seller
work with a qualified Real Estate Agent or Broker during a short sale transaction. The designation used is a
CDPE (certified distressed property expert).
REO: Real Estate Owned. This type of property is what we call bank owed. It has either been given back to
the bank by a seller or has gone through the state mandated foreclosure process. These properties are usually
significantly discounted to sell quickly by REO experienced agents or companies. These properties are
preserved and maintained by management companies until they sell. Many of these properties need a lot of
work and only qualify for cash purchase or conventional financing due to the amount of repair needed.
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Sometimes the amount of repairs needed will be listed on the property and sometimes paid for by the bank or
financial institution that owns them.
Corp. Owned: Corporation Owned. These are properties that either a group of investors or a small bank have
owned and agree to sell. This is still a form of a bank owned property but owned by a corporation that took
the property back through the foreclosure process or state mandated redemption process and has legal right
to the property and is able to sell. Many times these properties need work. There are many forms and
disclosures involved in purchasing these properties and generally the corporation selling the property has their
own contract and addenda that go with the property. Ask your local Real Estate Agent or Broker about the
differences in these forms as many times the state you live in has their own state approved contracts that
have been approved by their state Realtor Association.
HUD: Housing & Urban Development. A HUD home is a 1-to-4 unit residential property acquired by HUD as a
result of a foreclosure action on an FHA-insured mortgage. HUD becomes the property owner and offers it for
sale to recover the loss on the foreclosure claim. Most HUD homes have a waiting period for Owner Occupant
Buyers. HUD Homes are initially offered to owner-occupant purchasers (people who are buying the home as
their primary residence). Following the priority period for owner occupants (usually 15 – 30 days on market),
unsold property is available to all buyers, including investors.
Important Facts about HUD Homes:
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HUD does not warrant the condition of its properties.
HUD will not pay for the correction of defects or repairs.
A HUD home is generally sold as/is making a Home Inspection prior to closing an important part of the
purchasing process.
HUD does not grant new financing on their properties but a new homeowner can choose from multiple
types of financing should the property qualify. Refer to page 10 - 11 for HOMPATH Financing options
that are promoted on these properties.
FSBO: For Sale By Owner….yes they still exist. While I do not recommend a person to sell their home on their
own, people still do it to save money. In trying to save money, many times homeowners find themselves in a
position of fault by doing things illegally and this can become costly. This is why many real estate companies
offer different types of Agency which allow a homeowner to save some funds by picking the type of
representation they prefer. Refer to Agency section of this book for further details. FSBO’s can also waste
time by not advertising to the public and other buyers who are represented by other Real Estate Agents and
Brokers. It is important to know and understand that when selling property certain laws MUST be taken into
consideration for both parties to a transaction. A Real Estate Agent or Broker knows these laws, adheres to
these laws and protects the seller and buyer from themselves by adhering to their fiduciary responsibilities.
When you weigh the consequences of a potential lawsuit VS paying a few thousand extra for professional
representation, it’s worth it. Trust me. Not to mention, it’s a tax write off to the seller as a cost to the real
estate transaction.
HBO/TS: Human Being Owned/Traditional Sale. I devised the term HBO due to the fact that many properties
throughout the United States are currently vacant, bank owned, or non-owner occupied. I use this term in
place of “Real Seller” as “Real Seller” sounds boring nowadays. A traditional sale, which used to just be a
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normal real estate transaction prior to the recession of 2008 – current is the same as an HBO. It involves a real
seller who is current on their mortgage and is ready, willing and able to sell the property to a qualified buyer.
CD: Contract for Deed. A contract for deed is a type of purchase where a buyer agrees to put a down
payment towards a property and make monthly principle payments at an interest rate determined by the
seller and state usury rate laws until the property is either paid off over time or financed at the end of the
contract term. The contract term is between the buyer and seller. In a contract for deed the seller and buyer
both retain interest and rights in the property until the day the buyer closes on the property. It is important to
know the seller retains their right of ownership throughout the timeline of the transaction or until the
property is sold. Should the buyer default on the contract or become delinquent on the monthly payments
the property can then be retained back by the seller and all monies already paid are lost by the buyer. The
contract for deed terms are up to seller and buyer to make agreements upon. I suggest having an experienced
Real Estate Agent, Broker or attorney draft the terms of the contract prior to being signed by both parties. It is
important to know that a contract for deed must be recorded and notarized in order for it to be legally valid
and for the buyer to have their rights retained in the property.
RTO: Rent –to-Own. An RTO involves a renter and a landlord/seller. A renter agrees to rent the property with
future interest of purchasing the property. This is a great way for a renter to repair their credit, establish
credit and save money for the down payment. There is still a deposit given by the renter of 1st and last
month’s rent given to the landlord/seller. This type of purchase can be done several ways:
1. A potential buyer can agree to rent the property from a seller for a set period of time or ending date. At
which time, the buyer must either buy the property or move out or agree to new rental terms.
2. The monthly rent is generally not applied to the purchase price of the home, but these terms can be
negotiated with the seller at time of contract.
3. The seller cannot charge a potential buyer a monthly payment based off an interest rate for the remaining
Note/Mortgage on the property. The monthly rental payment should cover the costs associated with the
property and any extra rental fees. Should a potential buyer move out earlier then the agreed upon date most
times their deposit is automatically forfeited due to breach of contract.
Side Notes: It is very important to consult a qualified expert in each of these sale types. There are many
different factors that can affect a transaction and your rights as a buyer, seller, landlord or renter. It is also
very important to make sure you understand your rights as a buyer, seller, renter or landlord. A licensed real
estate professional, attorney or tax accountant can help you make an informed decision if need be or answer
your questions. In a demanding market, such as we are in now, a buyer that can close quicker, have less delay
for approval, quicker underwriting turn times and show willingness to proceed faster than the competition,
may get the property of their choice over someone who is less prepared.
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Accepted contract. Now what?
For Buyers:
You have found the perfect house for the perfect price. You met with your agent or broker and have signed all
necessary documents to present to the seller. The seller has accepted your terms of the contract and signed
the purchase contract and their agent or broker has returned the signed purchase contract making the deal
official. Now what do you do???
Here is a 6 point generic outline for the buyer of what should be done or considered after the signed contract
has been accepted. While each buying transaction is different and some are easy and some are difficult this
will give a basic starting point for most real estate transactions.
1. Make sure you call your loan officer, mortgage broker or retail lender and have them issue a preapproval letter for the seller and seller’s agent. If you’re doing a cash transaction make sure you have
proof of funds delivered to the seller or seller’s agent.
2. Depending on what state you live in you will have earnest money, good faith deposit, or down
payment money that needs to be sent to the seller’s agent. Make a copy of the check or certified
funds or copy of wire confirmation if wiring the funds. Have your agent or broker send/forward this
money to the seller’s agent or broker immediately once the purchase contract is accepted by both
parties and all contingencies have been removed.
3. If you have chosen to have contingencies written into the contract you must adhere to the timelines
given by all parties.
Inspection: The home inspection has to generally be completed within 3- 5 days after the contract is
accepted. Make sure you use a qualified inspector. Many states do not require licenses for home
inspectors so it is up to you to choose the right inspector. If the property inspection is contingent upon
the inspection findings then make sure you get this set up immediately so as to not cause any delays in
the closing time frame. Once the inspection is completed and there are no repair requests issued to
the seller, make sure you get a contingency release to move the closing forward. If there are repair
requests to the seller make sure they are completed in a timely manner.
Financing: If you have given a date of underwriting approval for your loan or made your loan
contingent upon property appraising for loan value then you have to make sure the date that was
entered is met.
Due Diligence: If you have chosen to have a due diligence period (usually 15 days) then you have to
make sure you meet the guidelines and describe what needs to be done. This is important as the seller
will have this contingency released if you do not describe in detail what you wish to perform.
Well/Septic: If you are choosing to have a Well and Septic inspected then you have to make sure you
make arrangements to have someone come out and get this done. Many times, a qualified EPA
inspector has to do this due to City and County regulations. Be sure to ask your agent or broker about
this.
Survey: If you are choosing to have a survey completed make sure you let the title company know this
in advance. Many times they have surveyors they do work with and can get you a deal on this as
Surveys are very expensive and take a lot of time to get completed.
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4.
5.
6.
7.
Pest/Insects: Most times this is covered in the general home inspection but many times it is not. Make
sure you discuss this with your real estate professional and also your home inspector. There can be
extra costs associated with this inspection.
Radon/Mold: There is almost always an extra cost for this inspection and many days involved as the
devices used have to sit in the property for many days and takes days for the results.
If you have chosen to purchase additional personal property or items from the seller make sure there
is a personal property addendum signed. If you are purchasing the personal property or items
separately from the real estate transaction then make sure you get an itemized receipt with cost of
each item. Save this receipt for tax purposes.
After the inspection you should deliver the signed purchase contract and copy of deposit money to
your loan officer, mortgage broker or retail lender. If you are paying cash for the property then you
will only send a copy of the signed purchase contract and proof of funds to your Title Company or
escrow closer along with wiring instructions.
If you are purchasing into an HOA make sure you receive copies of the Association by-laws, rules &
regulations, and condo disclosures. Be aware of your rescission period for reviewing these documents.
Make sure your loan officer, mortgage broker or retail lender has updated financials to send to the
underwriter. This updated financial package should included the following: 2 months pay stubs or
proof of income, 2 months bank statements, 2 years current year taxes (make sure you sign them), 2
years of W2’s, proof of down payment or gift funds and a copy of deposit check.
For Seller’s
Your home has been listed for a short time or long time depending on the market you are located in. You have
finally received and accepted an offer on your property and agreed to the buyer’s terms and conditions. You
have discussed with your agent or broker all paperwork and everything seems in order. Now what do you
do???
If you are selling your house and moving into a new home this is a 2 stage process for you because you are
selling and now hopefully buying again. Follow this 5 step generic outline and then refer to the For Buyers
section for your re-purchase outline of steps.
1. Make sure your agent or broker has received the deposit funds from the buyers and deposited them
to the appropriate account.
2. If the property has an Association it is important to make sure to get the buyer the most current and
updated Association documents including, by-laws, rules & regulations, and disclosures.
3. Make sure you allow all inspections to take place when they are scheduled by the buyer or buyer’s
agent. Also, make sure your agent or broker follows up with the buyer’s agent after the inspection to
get the contingencies released as soon as possible and make any necessary repairs requested by the
buyer.
4. Have your agent or broker send the signed purchase contract to your Title Company or escrow closer
to begin the title work and closing documents.
5. Have your agent or broker follow up with the buyer’s loan officer, mortgage broker or retail lender as
to where the buyers file is at with the underwriting and closing date.
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Now that there has been an accepted purchase contract by both parties and the buyer’s loan is in the
processing stages, a closing date has been set and all contingencies have been removed, you will now
move to your pre-closing duties.
What are your Pre-Closing Duties?
The pre-closing duties are different then the post contract steps. These duties are for both buyer and seller
and should be followed to protect both buyer and seller. These are general duties your agent or broker should
take care of but you must take responsibility so there are no excuses at closing time.
Buyers Pre-Closing Duties:
1. Updated Loan Documentation: I have stated this multiple times because it is extremely important for
borrowers to know how much these updated financials mean to an underwriter. Keep in touch with
your loan officer, mortgage broker or retail lender every few days to make sure the loan is on track and
no new updated info is needed. The underwriters can ask for information up to day of closing. If the
info requested is not at your “fingertips” or easily obtainable the closing may be postponed. Your
lender may also request a copy of the cancelled deposit check prior to closing verifying the deposit
check has been deposited into the sellers brokers trust account or title company account. This
verification is generally requested in a copy of the cancelled check, proof of deposit on bank
statement, or copy of withdrawal and/or deposit slip.
2. Appraisal: You may have to pre-pay for the appraisal so be prepared to pay up-front. Make sure you
receive a copy of the appraisal. You may be able to write a personal check to your lender or give your
credit card info to pay for the appraisal. Be advised that if you are doing an FHA loan, the FHA
appraisal may come back with FHA work orders prior to being signed off on by the underwriters. If
these work orders arise, it will be up to the buyer’s agent or broker and seller’s agent or broker to
negotiate the terms of these work orders being completed. It is important to note that once the work
orders are completed as required by the FHA appraisal, an FHA appraisal re-inspection may be
required. More than likely there will be an additional fee for this in the amount of $150 - $250. Be
prepared to have this as an additional expense.
3. Homeowner Insurance Policy: Once you find an insurer that meets your requirements have them issue
a policy and send the Insurance Declaration page to your loan officer, mortgage broker or retail lender.
If you are purchasing a property that has an HOA then your loan officer, mortgage broker or retail
lender may request a copy of the associations blanket insurance policy. Be sure to ask them or notify
them of this as you do not want to be scrambling to order this at the last minute.
4. Association: If you are buying a property that has an HOA make sure you file all necessary New
Homeowner paperwork with the association. Generally, you give them contact info for you to receive
updated association documents and invites to meetings. You will also have to have an updated
Current Dues Letter from the association given to your mortgage broker or loan officer. This can be
ordered by buyer or seller or Title Company. There is a cost involved for ordering the Current Dues
Letter.
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5. Title: While it is the responsibility of a Title company to do the research necessary on a property to
confirm it is free from previous liens, assessments and encumbrances it never hurts for the buyer to
perform their own research. I suggest the buyer call the county to confirm there are no upcoming
assessments or future assessments that are on the books. You can also attend upcoming city council
meetings to find out upcoming city information.
6. Utilities: All too often I receive phone calls months after a closing takes place stating the new owners
of a property are receiving utility bills from the previous owners. I strongly suggest a new buyer to call
the Dept of Public works or City billing dept in the city they are buying in to confirm that all utility bills
are paid or at least get a copy of the bills and make sure they get paid at closing. Otherwise, the new
buyer may be held responsible for these amounts to the city. If they do not get paid, they may become
levied on the property taxes.
7. Property taxes & Assessments: When you buy a property the taxes may be pro-rated to day of closing.
It should be the responsibility of the new buyer to call the county and check to make sure there are no
increases in taxes for the upcoming year. If there are upcoming tax assessments or increases in
property taxes you will be forewarned in advance. This may lead to an increase in mortgage payment
or escrow shortage with your lender. Your lender will then charge you an interest rate on the amount
needed for an escrow shortage.
8. Down Payment Funds: It is important to check with your Title Company to see if they are going to
request a certified check, wire transfer or personal check at closing for your down payment amount.
9. HUD1 Settlement Statement: Make sure you review the HUD1 settlement statement provided by your
lender 24 hours prior to closing. Should any changes need to be made the buyer will have ample
amount of time to have them changed and an updated HUD1 issued by the lender. The HUD1
settlement statement provides all the closing amounts and fees needed to close on your property. It
also, lists the cash to close amount the buyer will need to obtain prior to closing.
10. Directions to title company: I recommend that a buyer find out where the title company is located
prior to showing up for closing. Many times there is road construction or traffic jams en route to the
closing. Most closings take place in the morning or early evening and this is during peak traffic hours.
You do not want to show up late to your closing.
Sellers Pre-Closing Duties:
1. Utilities: Make sure you call your Dept of Public Works in the city you live in. Make sure you also call
your gas company and have them mark the shut off for the day of/after closing depending on what
date you vacate. Also, call your cable or internet provider and notify them of removal or transfer of
satellite dish or cable.
2. Taxes & Assessments: Make sure the title company pays all delinquent assessments, future
assessments and any additional levied fees on the property. Many times the Title Companies do not
catch all of these fees.
3. Loan Payoffs: If you have a mortgage on the property that is being paid off please make sure you call
your lender 2 weeks in advance to order a mortgage payoff. Let them know the date you are closing.
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4.
5.
6.
7.
8.
If you already paid a monthly mortgage payment and order the payoff, you will get that money back
from your lender a few weeks after closing.
Association Payments: Make sure you keep current on all association payments. If you close in the
middle of the month and have to pro-rate the monthly association payment then make sure it is on the
HUD1 Settlement Statement as a credit to the seller from the buyer. Also, make sure the association is
aware that you are selling the property and that you have all documentation in order to transfer to the
current buyer at closing.
Homeowner Insurance: Your homeowner insurance will be pro-rated from day of closing so you will
receive a refund within 2 weeks after closing from your current insurance company. If you are repurchasing you may be able to roll that amount to your new policy. Be sure to check with your
insurance company.
House Maintenance: Make sure to keep your lawn mowed and home cleaned up. Do not do anything
to the property that changes its condition from when the buyers previously viewed the property to
write their offer. The buyers may want to view the home prior to the closing date for a final walk-thru.
HUD1 Settlement Statement: Make sure you review the HUD1 settlement statement provided by your
Title Company 24 hours prior to closing. Should any changes need to be made the seller will have
ample amount of time to have them changed and an updated HUD1 issued by the Title Company. The
HUD1 settlement statement provides all the closing amounts and fees needed to close on your
property. It also, lists the cash to seller amount the seller will receive at closing from the Title
Company.
Directions to title company: I recommend that a seller find out where the Title Company is located
prior to showing up for closing. Many times there is road construction or traffic jams en route to the
closing. Most closings take place in the morning or early evening and this is during peak traffic hours.
You do not want to show up late to your closing.
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What are your Post-closing duties?
Congratulations now that you have made it this far. By now you are overwhelmed with information, stressed
out and maybe even a little angry. It is important to know this: If a buyer and seller walk away from the
closing table upset, it means the real estate transaction was fair for both sides.
This next part is very important for all buyers of real estate to know. Follow these next steps to make the next
30 or 40 years of owning your home simple and effective.
1. Your title closer will hand you a package at the end of the closing with a ton of information. READ IT
over the next few days or weeks. Make sure you know about your loan and which loan product you
have chosen.
2. Take out the HUD-1 settlement statement and put this in a safe place. You will give this to your
accountant at the end of the year come tax time. This will allow the accountant to see what you have
paid in closing costs, pre-paids and escrow. You may be entitled to tax incentives.
3. Immediately go to your bank of choice and start a HRSF (Housing Repair & Savings Fund). My general
rule is to put 10% of the mortgage amount each month into this savings account. You will need it, I
promise you. Things happen during the homeownership period and you do not want to be shocked
when they do. Things break, need repair and cost money all the time such as: (broken appliances,
insurance deductibles, broken A/C, broken furnace, leaky hot water heater, new carpet, new siding,
replacing a roof, new windows, deck repair, upcoming assessments, etc.). If you cannot afford 10% of
the mortgage amount then start with 5%. Any amount is better than no amount.
4. Wait a week and call your new lender and set up auto withdrawal. If you have the payment set for
auto-withdrawal or bi-weekly payment you will pay 1 extra payment each year. This will save roughly 7
years of payments on your property over the life of the loan. Example: A 30 year loan with bi-weekly
payments set up will turn the loan into a 23.5 year loan. This will save you tons of money and interest
payments. If you cannot afford to make bi-weekly payments, then I suggest planning to make 1 extra
payment to principle each year. This will result in the same early loan payoff.
5. If you bought a property at a reduced price it is important to note that you may be eligible for a
property tax abatement through the county you bought your property in. Go to the county website or
even go down to the county tax department and inquire into this. It may save you thousands of dollars
over the time you’re in the property. If you do not know what property tax abatement is, ask your
county tax department for literature on this.
6. Each year you are in your property and homesteaded you may be entitled to a PTR (Property Tax
Refund). Yes this is true. It is called and MR-1 Property Tax Refund. You may be entitled to a refund
on a certain portion of your property taxes at the end of each year. You can to www.IRS.gov and type
in Property Tax Refund or go to your states Department of Revenue site and you can download the tax
forms from their site. You will find out immediately what amount you qualify for and you may even be
able to do it online for a faster response. Income qualifications may apply.
7. Order trash bins if you live in a non-association community. Shop for the best rate and best deal.
Many times you can get 2 free pick-ups for new homeowner service. Check into recycling for your local
community as well. Many times this is cheaper than paying for named brand service.
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8. Call and have utilities transferred. This would be for gas, electric, water and cable. Many times you
will receive a welcome package from the city with their local vendors they work with or that are
established in the area.
9. Transfer your mail over to your new address. Make sure you do this right away so as to not delay any
new mail coming to your home. Your new lender may send out a welcome package as well and your
first mortgage payment coupon.
10. Be pro-active in introducing yourself to your neighbors. Many times, neighbors are too busy to stop
and say hello. This is not the 1950s anymore so bring the brownies to them or hold an open house to
meet them all.
Follow these 10 post closing tips and you will be en route to a successful home owning experience. These tips
are here to help you through the stressful times and make sure you have enjoyment in owning your new
home.
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Conclusion
I am sitting in my office and it is now a dreary fall morning at the end of October 2012. The sky is grey, the
wind is fierce and the rain is sleeting. My phone has not rang this morning with anyone wanting to know if
they have Mortgage Insurance on their house. Now that this book is completed everyone should have their
answers to Mortgage Insurance and many more. I hope these questions and answers have made you more
aware of the real estate industry and all that encompasses it. Please use this book as a tool and resource
guide for your current or future buying or selling adventures.
Thank you for reading.
Remember to Be informed, Be accountable and protect your investment.
Legal Disclaimer: This book is not intended to provide legal advice or tax advice to anyone. A qualified attorney or tax
professional should be used for any legal or tax related questions. This book is not intended to deter, persuade or
convince anyone to make any legal decisions of any kind.
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References & Websites
Here is a list of the websites provided in this book. They can be used for research or reference
points to learn more about financing, rules and regulations.
Nationwide Mortgage Licensing System & Registry or NMLS
www.mortgage.nationwidelicensingsystem.org
Housing & Urban Development or HUD
www.HUD.gov
FannieMae
www.FannieMae.com
FreddieMac
www.FreddieMac.com
Federal Housing Administration or FHA
www.FHA.com
Department of Veterans Affairs or DVA
www.DVA.gov
United States Department of Agriculture or USDA
www.USDA.gov
Homepath Mortgages & Properties
www.Homepath.com
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