Short Sale Tips – Why are the Banks so Picky with Paperwork?

Posted on 02. Jun, 2018 by ctlms in Blog, Foreclosures, My Blog, News, Real Estate, Short Sale, foreclosure

I get this question all the time "Who cares about that minor error or missing information on the paperwork?" The answer is... THE BANK DOES!

When you are dealing with a short sale negotiation on your real estate sale transaction, there is a lot more Dot your "I" and Cross your "T" than most agents are used to on non-short sale transactions.

So very often agents get frustrated or at least ask, why is all this needed?

The simple answer is that the Banks Require it. But why do the banks require it?

I think most people remember the whole "Robosigning" lawsuits where the federal Attorney General, as well as many state Attorneys General, sued many of the largest mortgage servicers and banks for sloppily doing their foreclosure paperwork causing them to cause much harm to the public with errors such as foreclosing on properties that were not collateral for a mortgage or where payments were current.

Well, those big bad banks ended up settling with the Government for Billions and Billions of dollars over those issues.  Since then, the banks, for the most part, are extremely diligent with their foreclosure files to avoid another issue like this.  So then you ask, "what does this have to do with a short sale? This is not a foreclosure, it is a sale."

The issue for the banks is that once the loan is delinquent, anything they do in regard to trying to assist the homeowner to keep the home or avoid foreclosure becomes part of their foreclosure file if they do have to foreclose.  So they are just as diligent with the paperwork on a short sale as they would need to be in a foreclosure lawsuit.  In addition, there is much more regulatory scrutiny and compliance that they have to abide by these days.

So this all results in the banks requiring nearly every document they receive to be next to perfect.  Now that said, the banks are not all created equal.  Some of them take these requirements to the limit and others are more lax and allow for a little more sloppiness than others.  But to avoid delays, the best practice it to have your paperwork as well put together as possible.

I specifically state that this is best practice "To Avoid Delays". Here is why.  If you send something to the bank that they request as part of the short sale review, it typically takes a least a couple days for it to get reviewed and sometimes over a week.  If when it gets reviewed the bank rejects it for some error or missing information, it can then be a couple days or more before you even know about it, if you are diligently following up with the bank.  If you are not diligent, it can be weeks before you know.  Then you must go about correcting the problem and resubmitting the information to the bank, which again will take some time to be reviewed.  So just one issue can cause a delay in the review of your short sale of a few days to over a month, depending on the situation.  I think we would all agree that taking a little more time to perfect your documents before submitting them would have caused less delay.

So what kind of picky issues are we talking about here?  Below is a list of very common issues we see all the time that we then must request be addressed so as to not cause more delays in the short sale review process.

Common Document Issues

  • Incomplete information
  • Unreadable information
  • Cross out on listings or sales contracts
  • Unknown terminology
  • Missing pages
  • Gaps in consecutive documents
  • Unsigned or Undated documents
  • Documents that do not fully address the required information
  • Outdated documents

I do not want to make this article too long, but if you have made it this far, you are interested for more information.  So let me add some detail to the above list.

  1. Incomplete info information.
    1. This is common on listing and sales contracts.  The full property address with City State and Zip Code must be filled in every place the address is listed.
    2. Abbreviations are often not accepted.
    3. Ares of the contract or listing not used should have an N/A placed in them or the lender may consider it incomplete.  Do not just Cross through it.  If you, they will want it initialed.
  2. Unreadable information.
    1. For listing and sales contracts, typed is best and faxed as few times as possible is also best.
    2. If any part of the document is cut off, even if you think the missing information is of no consequence, the bank will likely reject the document.
    3. Sloppy handwriting that is not understandable is often rejected
    4. Use BLACK ink.  Blue ink will scan or fax much lighter and may not be readable
  3. Cross outs.
    1. Seems like common sense.  But if there is anything crossed out, all parties that signed the document will have to initial the cross out.
  4. Unknown Terminology
    1. Acronyms are often not understood
    2. In CT we often see the acronym NRD used.  This stands for Notice Receipt Date and can be found on the GHAR short sale rider.  The issue is this is not a widely used term nationally.  The banks don't know what it is are not willing to search around the other documents to figure it out.  They simply reject it stating the document must use Short Sale Approval instead.
  5. Missing pages.
    1. This is most common with seller documents.  For instance, if a bank statement is numbered pages 1-10 the bank will require all 10 pages.  It does not matter if the last page is blank or has junk information on it.  The bank does not know that unless they see it.
    2. If your sales contract pages are numbered, all pages will be required by the bank.  Where we this cause issues is if you include the property condition disclosures in those page numbers.  If they are numbered, the bank will want to see them.  Normally the bank does not ask for the disclosures.  But now that they need them because they were numbered with the contract, they will be picked through with the same scrutiny as the other documents.
  6. Gaps in Consecutive documents
    1. Usually, pay stubs or bank statements.  They just be in order.  If the bank wants last 4 pay stubs.  They must be last 4 in a row.  Same for bank statements.
  7. Unsigned or Updated Documents
    1. Documents such as the bank's application form, hardship letter, and tax returns must be signed and dated.
    2. On the tax returns, the 2nd page of the IRS 1040 form must be signed and dated in the signature and date field.  Typically the copy the seller has is not the signed copy that was sent to the IRS.  They simply have to sign and date it today.  The date does not have to be the date it was sent to the IRS.  It can be today's date.
  8. Documents that do not fully address the required information
    1. Proof of Funds from the buyer for 100% of the purchase price.  This means if they are getting 80% financing and are putting 20% down at closing, the bank wants to see proof of funds from them that they have the 20% needed.  A bank statement, brokerage statement or letter from a bank branch can be used.  3rd party verification from their lender stating the lender has verified that they have the funds, will not be accepted.
    2. Bank statements.  The banks require bank statements from the sellers for ALL accounts they have.  If they have transfers from savings to checking and only supply checking statements, the bank will see the transfers and know they have other accounts and will require them.  Same thing if they have their income direct deposited into more than one bank account.  The bank will see it and make sure they have all the accounts.
    3. For the self-employed.  For income verification, a minimum 3-month profit and loss statement is required as proof of income.  The same is true of 1099 employees where their employer does not deduct for taxes when paying the employee.
  9. Outdated documents
    1. Again pretty self-explanatory.  If they ask for the most recent, then documents from a month ago will not be accepted.

Okay now that I have thoroughly bored you, you may go about your day ;) .  For those of you that made it through this far, congrats to you being thorough enough to care about the subject.

As always, feel free to reach out to me with any questions.

Sean Wilder

Loss Mit Services

860-265-3727

FHA says 40 payments behind is the limit for Short Sales!

Posted on 25. May, 2018 by ctlms in Blog, Foreclosures, My Blog, News, Real Estate, Short Sale, foreclosure

I have said it many times.  There are more reasons a seller can be denied for a short sale on an FHA loan than on any other type of mortgage!

Unlike many of FHA's rules for short sales, this one is simple and straightforward.

Once the loan is 40 payments delinquent, a short sale is no longer an option.

Simply put, FHA will deny any request for a short sale if the file is 40 payments or more behind.  That sounds like a long time and you could think that the homeowner "dragged it out" long enough.  The truth is that many homeowners can find themselves in this situation because they have been struggling for years to try to save the home.  Having gone through years of running around with their lender and still not having a resolution, they find themselves this far behind on payments and then someone finally suggests a short sale.  But by then it is too late if the loan is FHA.

Another challenge with this rule is that many of the mortgage servicers do not know it. Chase for instance, will have you go through the whole application and review process which can easily take 4 months and not till they send it to FHA for the final approval, do they learn that FHA rejects it for being over 40 payments behind.  This is partially due to how convoluted the FHA guidelines are.  This particular rule is actually not written in the guidelines.  But if you call the HUD National Servicing Center, they will confirm that it is, in fact, a rule.

So the take away here is that you need to find out what kind of loan you are working with and the current status of payments.  If it is FHA and over 40 payments behind, a short sale is not an option.  If it is FHA and nearing 40 payments behind, then you have very little time to get a short sale done.

As always, feel free to reach out to me with any questions.

Sean Wilder

Loss Mit Services

860-265-3727

Short Sales and Home Inspections… When to inspect?

Posted on 16. May, 2018 by ctlms in Blog, Foreclosures, My Blog, News, Real Estate, Short Sale, foreclosure

It is becoming more common for buyers to inspect prior to submitting to the lender.

In a typical real estate sale, the buyer does their home inspection within 1-2 weeks of the seller accepting their offer.  However, on short sales in CT, it has been most common for buyers to want to wait to do their home inspection until after the short sale approval has been received.

Times have changed.

It is becoming more common for the buyer to elect to do their home inspection within the typical 1-2 weeks after the offer is accepted by the seller and prior to the initial offer going to the short sale lender for a decision.

The reason is, it makes more sense now than ever for the buyer to make that investment earlier.

It has always been a better situation for the seller if the buyer does the inspection prior to waiting a few months to get short sale approval.  For the seller, the reason it is preferable is that if the buyer elects not to proceed with the purchase after conduction the home inspection, the seller would have more time to find another buyer if the inspection was done earlier in the process.  This is because most sellers needing a short sale are also facing foreclosure.  So they only have some much time to get it done, prior to foreclosure.

For the last several years, it was hard to find a buyer and especially for a short sale.  With a stable or declining interest rate environment and plenty of inventory to choose from, there was not much incentive for the buyer to spend the money on a home inspection until the short sale was already approved.  That is because if they decide not to proceed with the purchase after the inspection, it was unlikely their interest rate for their mortgage would be higher now than it was a couple months earlier, and there were still plenty of other houses to choose from.

But times have changed. With mortgage interest rates rising and inventory low, the buyer has much more incentive to determine if they want to proceed with the purchase, earlier in the transaction.  If they wait a couple months for short sale approval and then back out of the sale, the interest rates may have risen costing them more money for the next property and the perfect property for them may have sold in the meantime to someone else.

So here are a few reasons why it makes sense from the buyer's perspective to inspect at the beginning.

1. If the results are bad, they are out looking for another home much sooner.  If they waited, homes available now may no longer be available so they may miss the perfect house for them.

2. If they wait and back out later, they may be faced with higher interest rates either costing them more for the same loan amount or causing them to qualify for a lower purchase amount.

3. If there are issues with the property, and the buyer wishes to purchase but wants to renegotiate the purchase price, the lender has not already seen the higher price that the buyer first offered.  It is much less likely to get the bank down on their price after they have already approved a higher offer.  Going to the bank with the reduced offer up front has a better chance of success.

4. The inspection report and if needed repair estimates can be shown to the bank's appraiser or BPO agent to justify the buyer's offer.  This increases the chances that the bank agrees that the buyer's offer is current as-is market value.

Ultimately the decision to inspect early or later is the buyer's decision.  However, with more short sale properties receiving multiple offers, it is also a negotiation point for the seller during those negotiations.  A buyer willing to inspect at the beginning is much more desirable to the seller than one not willing to do so.

As always, if you have questions on a short sale I am always available to assist.

Sean Wilder

Loss Mit Services

860-265-3727