Jim West
3/6/2016
The Short Sale Guide
Vocabulary
Short Sale – A short sale occurs when a lender agrees to accept a lower amount than a
person owes on a property in order to cut their losses and avoid a costly foreclosure
procedure. This is usually done when a home owner is in difficult financial circumstances
and owes more than the value of their property.
REO – Stands for “Real Estate Owned”, property which is in the possession of a lender
as the result of foreclosure for forfeit.
BPO – Stands for “Broker Price Opinion”, a BPO is the most common way that lenders,
servicers and asset management companies value short sale and REO properties.
Distressed Property – A property that is in foreclosure proceedings or where the
homeowner is in default.
Asset Manager – An individual or company that manages the assets, tangible or
intangible, for a bank or financial institution. Asset managers can be responsible for
disposition of a lenders assets and also maintaining the property, ordering BPO’s, trashouts, changing locks, etc.
Deed-in-Lieu – or “Deed in Lieu of Foreclosure” is a process in which the borrower
agrees to deed the property back to their lender in order to avoid the inevitable
foreclosure and forced seizure of the property. Most lenders require a property be on the
market for 90 days before they will consider a Deed-in-Lieu.
Negotiator/Processor – A negotiator is a generic term used to describe somebody in a
lender’s loss mitigation or short sale department who processes, negotiates or works with
short sale files.
Promissory Note – A written and signed note from a borrower agreeing to repay a
specific amount of money.
Cash Contribution - A lump sum dollar amount a lender will sometimes request in
order to approve a short sale
MI Company – A mortgage insurance company
Deficiency Balance – The difference between the proceeds from the sale that a lender
will receive and the actual amount owed to a lender after all closing costs
Hardship – A term used to describe the events and change in financial situation that led
the borrower to no longer be able to afford a property.
Jim West
3/6/2016
Lender Approved – A term sometimes used to describe a short sale in which
preliminary steps have already been done in the short sale process and the lender has
already agreed to a specific price and terms of a short sale transaction in advance of
having an offer to purchase the property
Arms Length Transaction – A term used to describe a transaction between multiple
unrelated parties acting in their own best interests. This is to insure a property is not sold
to a relative, or there are no other side dealings or agreements.
Loss Mitigation – A division within a bank or financial institution that mitigates, or
negotiates the loss of the bank, or a firm that handles the process of negotiation between a
homeowner and the homeowner’s lender. A loss mitigation department can handle loan
modifications and short sale transactions.
Short Sale Package – A term used to describe the set of documents presented to a lender
in a short sale. This package can include, but is not limited to, a listing agreement,
authorization to speak to a lender, financial documents, offers, preliminary HUD-1, or net
proceeds statements and BPO’s among other things.
Why would a lender accept a short sale?




Cut losses
High numbers of foreclosures look bad to investors
Can effect relationship with FDIC
Lenders are required to consider them by law in many cases
What are the alternatives for a homeowner in financial hardship?






Bankruptcy
Foreclosure
Loan Modification
Forbearance/Repayment plan
Deed –In-Lieu of foreclosure
Short Sale
What can delay a short sale getting approved?





Mortgage Insurance Company
Negotiations with a second or third lender
Lack of Documentation presented to a lender
Lack of preparedness & experience on behalf of agent (bad HUDS/HOA
Liens/Tax & IRS Liens)
Investor Approval
Jim West
3/6/2016
Note that 3rd party mitigation companies are NOT regulated like a Real Estate Brokerage
company is. If working with a bank in a short sale is too time consuming for an agent, a
designated in a real estate office can easily learn how to process and mitigate short sale
files. This can be ideal for accountability and communication purposes.
NOTE: Here in Ohio, a person has to be a licensed real estate agent in order
to be able to negotiate with a lender on behalf of a homeowner.
Why should a seller consider a short sale?
Below is a chart comparing the effects of a short sale versus a foreclosure on a
borrower’s current and future credit, employment, and liability. A bankruptcy is not an
easy way out; it can be a permanent security clearance issue. A bankruptcy can also effect
current and future employment. Some forms of bankruptcy will require the debt to be
repaid, but should always be discussed with an attorney. If a homeowner is declaring a
bankruptcy, they can still do a short sale but it will typically require the court trustee’s
approval.
ISSUE
Credit Score
Credit History
Current
Employment
Future
Employment
SHORT SALE
A short sale itself will minimally affect your
credit score, usually around 50 points. Late
payments usually have the largest negative
impact on your credit score & can average
30 points or more, each.
There is not a credit reporting item for a
short sale. Upon sale, your mortgage
company will typically report the sale as
‘Paid’, ‘Settled in full’, or ‘Paid as
Negotiated’ on your report.
A short sale is not an actual item on your
credit report and typically will NOT affect
your future employment.
A short sale is not an actual item on your
credit report and typically will NOT affect
your employment.
FORECLOSURE
Your credit score could be
lowered 300+ points and will stay
on your record for 10 years!
A foreclosure will remain on your
credit for 10 years and is
permanent in the public records of
your county.
Your employer has the right and
many times will actively check
your credit if you are in sensitive
positions. Sometimes a
foreclosure is grounds for
immediate re-assignment or
termination.
Employers do check your credit
history for many job applicants. A
foreclosure is one of the most
negative items you can have on
your credit and may affect future
employment.
Jim West
3/6/2016
Future Loan with a You typically do not have to declare to
Mortgage Company future mortgage companies that you
previously performed a short sale.
Future Fannie Mae
Loan – Primary
Residence
Future Fannie Mae
Loan – NonPrimary
Deficiency
Judgment
Deficiency
Amount
After a successful short sale you can be
eligible for a Fannie Mae backed loan after
only 2 years
On the federally mandated loan
application form 1003, you will be
required to answer ‘YES’ to the
question, “Have you had property
foreclosed upon or given title or
deed in lieu thereof in the past 7
years?” Answering ‘YES’ affects
the interest rate you will receive
After a foreclosure you will be
ineligible for a Fannie Mae
backed loan for a minimum of 5
years
After a successful short sale you can be
eligible for a Fannie Mae backed loan after
only 2 years on non-primary residences
After a foreclosure you will be
ineligible for a Fannie Mae
backed investment loan for a
minimum of 7 years
It is typical for the lender to give up the right The bank has the right to pursue
to pursue a deficiency judgment against the
the deficiency judgment in all
borrower. This is stated in approval letters
foreclosures (except where there is
and it is not legal to collect in many states
no deficiency)
A short sale home is sold at or near market
If the home does not sell at a
value and in most cases is a greater value
foreclosure auction it will have to
than a foreclosure sale which results in a
go through the bank REO system.
lower deficiency. This deficiency is
This will result in a longer time to
typically forgiven. Helping to cut your
sell and potentially a higher
lenders loss as well is also the ethical thing
deficiency judgment for the home
to do.
owner.
A Deed-in-lieu of foreclosure IS a credit reporting item. It is also a five year flag for a
Fannie Mae backed loan. Most loan modifications are also only temporary, as they have a
high re-default rate. Knowing the options and being able to explain them to a homeowner
is very important.