Short Sale and Foreclosure 101
- Refinance: If you meet the required eligibility, you can explore the Home Affordable Refinance Program (HARP) which offers a number of programs or do a loan modification through the Home Affordable Modification Program (HAMP)
- Do a lender workout: In forbearance, the lender spreads out the back payments, fees, penalties etc over a fixed number of upcoming payments to allow you to catch up. With loan modifications, lenders will often work with you to keep the home by reducing or rolling back interest rates, forgiving back payments or adding them to the loan into a fixed rate that wraps all the fees into the new loan. You do not need a realtor to assist you with this, just contact your mortgage provider.
- Sell and Bring Cash to Closing: You may have the financial ability to pay off your debt. This would be preferable over doing a short sale which can affect your credit and ability to purchase again.
- Offer the lender a deed in lieu of foreclosing: This is something to be discussed with your attorney and you do not need a realtor to assist you in this. This is a situation where you offer the lender your property in exchange for the cancellation of the note.
- Attempt a short sale: If none of the other options worked, you can try and sell your property for less than what is owed in order to avoid foreclosure.
- Foreclosure: When you choose to do nothing about your situation, you will end up in foreclosure. To understand what the legal process is in California, click here.
Waiting Periods to Finance Another Home
If you are or have experienced a Short Sale or Foreclosure, you may be wondering when you will be able to purchase another home. This list is the current waiting times for various loan types and are subject to change.
- Fannie Mae/Freddie Mac
Foreclosure: 7 Years from completion date
Short Sale: 4 years
Chapter 7 Bankruptcy: 4 Years from discharge
Chapter 13 Bankruptcy: 2 Years from discharge
Foreclosure: 3 Years from Completion
Short Sale: 1 year with Conditions
Chapter 7 Bankruptcy: 2 Years from discharge
Chapter 13 Bankruptcy: 2 Years from discharge
Foreclosure: 2 years from discharge
Short Sale: No specific waiting period
Chapter 7 Bankruptcy: 2 Years from Discharge
Chapter 13 bankruptcy: with a full 1 year payout
Short Sale Document Checklist
If you have decided to have me represent you in your short sale, here are the items needed. They will need to be the most recent:
- Mortgage Statement
- Tax Bill
- HOA statement (if applicable)
- Sellers Financial Information (FNMA 710 Form)
- Sellers hardship letter
- Supporting financial information
- Pay stubs or P & L if self-employed (last 2 yrs)
- Tax returns (last 2 yrs)
- IRS Form 4506T
- Bank Statements (2 months)
- Credit Card Statements
Supporting Hardship Information
- HOA Liens
- Medical Bills
- Disability Statements
- Unemployment benefits or status
- Divorce decree
Streamlined Short Sales
Fannie Mae and Freddie Mac
Fannie Mae and Freddie Mac will allow a streamlined short sale if the borrower/seller is more than 90 days’ delinquent, their mortgage is not secured by an investment property, and either (1) their FICO score is 620 or less or (2) their debt has been discharged due to Chapter 7 bankruptcy. With the streamlined process, the borrower/seller will not have to provide additional documents to prove a valid financial hardship, however, the borrower/seller will still need to complete the Form 710. If the borrower/seller does not meet the streamlined criteria, the short sale will be processed with additional paperwork requirements of the Form 710. Note that submitting the Form 710 prior to having a contract on the short-sale listing begins the pre-approval process for Fannie and Freddie Mac. The pre-approval process will be either streamlined or standardized, depending on the borrower’s/seller’s current financial situation. For Fannie Mae and Freddie Mac Streamlined Short Sales, borrowers/sellers are not required to be delinquent. At a minimum, they must be at risk of imminent default, which is defined by Fannie Mae as a loan that is not yet in default and where there is a very high probability of being in default soon. This option is available on owner-occupied housing only.
EXAMPLES OF IMMINENT DANGER OF DEFAULT COULD BE:
▶Other payments are being missed, but mortgage payments are current.
▶All accounts are in good standing, but credit cards are maxed out due to living expenses.
▶Hardship requirements on the Form 710 are met.
▶Borrowers savings are being depleted to pay mortgage.
FHA Streamlined Pre-Foreclosure
Principal residences, second homes, and investment properties are potentially eligible for FHA’s Streamlined Preforeclosure Sale (PFS) program, which does not require verification of financial hardship, provided that borrowers/sellers meet all program requirements. Note that such properties may be vacant but cannot be condemned.
FOR NON-OWNER-OCCUPANTS (BORROWERS/SELLERS WHO DO NOT OCCUPY THE HOME):
▶The borrower/seller is 90 days or more delinquent on their FHA-insured loan as of the date of the initiation of the short sale (the servicer’s review) and…
▶The borrower/seller has a credit score of 620 or below.
FOR OWNER-OCCUPANTS (BORROWERS/SELLERS WHO OCCUPY THE HOME):
▶The borrower/seller is 90 days or more delinquent on their FHA-insured loan as of the date of the servicer’s review.
▶The borrower/seller has a credit score of 620 or below; and
▶Except for military service members with permanent change of station (PCS) orders who meet the requirements for an FHA Streamlined PFS, owner-occupant borrowers/sellers must have been reviewed for loss mitigation home retention options. Servicers may only offer a FHA Streamlined PFS or deed-in-lieu of foreclosure to owner-occupant borrowers/sellers when one or more of the following conditions have also been met:
•The borrower/seller has defaulted on a trial payment plan within the last six months;
•The borrower/seller has defaulted on an FHA-HAMP or standard (rate-and-term) modification within the last two years.
•The borrower/seller has been deemed ineligible for a permanent home-retention option.
•The borrower/seller received a special forbearance but did not otherwise qualify for a permanent home-retention option by the end of the forbearance period.
FHA Standard PFS
▶Only owner-occupied properties are eligible for the standard pre-foreclosure sale, no “walk-a ways” or investment properties.
▶Exceptions: when it is verifiable that the need to vacate was related to the cause of default (job loss, transfer, divorce, death), and the subject property was not purchased as rental investment, or used as a rental for more than 18 months.
▶The servicer must verify the borrower’s/seller’s monthly net income and monthly expenses in order to calculate the Deficit Income Test (DIT).
▶The borrower/seller must provide documentation substantiating a reduction in income or an increase in living expense, and documentation that verifies the borrower’s/seller’s need to vacate the property (if applicable).
FOR OWNER-OCCUPANTS FACING IMMINENT DEFAULT:
▶Owner-occupant borrowers/sellers may be considered for an FHA Standard PFS if they are current or less than 30 days past due on the mortgage obligation and can clearly demonstrate that they are at risk of imminent default due to one or more hardships.
▶When approving a borrower/seller for an FHA Standard PFS based on the borrower’s/seller’s imminent default, the servicer’s servicing file must include evidence of the borrower’s/seller’s imminent default hardship and evidence that the DIT results in a negative value.
VA Compromise Sale
VA WILL CONSIDER A COMPROMISE SALE WHEN ONE OF THE FOLLOWING FINANCIAL HARDSHIPS EXISTS:
▶Veteran/seller experiences employer or financial situations that requires him/her to relocate
▶Decrease in income
▶Major medical expense
▶Death of a principal wage earner, spouse, or family member.
The seller/borrower must first obtain a sales contract in order to be considered for the program.