What Banks Require from Homeowners Before a Short Sale

Mary Jones watched each person who came to see 999 Gates Avenue, hoping they would show any sign of interest in making an offer.

But soliciting offers was only half our effort.

As Mary would learn, she would have to make her case to her mortgage lender long before an offer would go to contract.

The only options available

The modern mortgage business has evolved to provide the liquidity it takes to finance numerous borrowers American Dream of homeownership.  By bundling individual mortgages into a pool that backs a bond security sold to an investor is where parties like Fannie Mae, Freddie Mac, and other bond investors hold sway over what happens to a homeowner.

It’s tough to admit at this point that there aren’t many options available that favor a homeowner.  Where foreclosure  is concerned, identifying a cure for the mortgage default is the best and only approach to take.

Banks are interested in mitigating a total loss on a mortgage that a homeowner has failed to continue making regular monthly payments, and is why the following are the only workout options available:

• Forbearance
• Loan Modification
• Short Sale
• Deed in Lieu of Foreclosure

A Forbearance is a lender’s postponement of foreclosure in order to give the borrower time for an opportunity to make up for overdue payments.

A Loan Modification is a process where the terms of a mortgage are modified outside the original terms of the contract agreed to by the lender and borrower.

A Short Sale is a sale of real estate in which the proceeds fall short of the balance owed on the property’s mortgage balance owed that allows a lender to provide the borrower a letter of satisfaction if the sale is approved.

A Deed in Lieu of Foreclosure is a deed instrument in which a mortgagor (i.e. the borrower) conveys all interest in a real property to the mortgagee (i.e. the lender) to satisfy a loan that is in default and avoid foreclosure proceedings.

While each has its advantage and disadvantage, a foreclosure short sale is the only option that

• Allows Borrowers to remain in the property until it’s sold
• Permits the borrower to control the Conditions for a sale
• Creates an opportunity to negotiate Relocation Assistance
• Borrower can sell Personal Assets in a separate transaction
• Provides leverage to obtain a Letter of Satisfaction from mortgage lender

Of all the workout alternatives available, Banks favor short sales because

• It keeps the property occupied during the sale process
• cooperates with borrower to cure mortgage default in a market sale
• higher sales proceeds achieved while property is shown to buyers LIVED IN
• property maintenance conducted for favorable appearance
• municipal and utility services maintained by owner

But with all a lender is prepared to do, this extraordinary cooperation is not granted until the borrower can make their case.

Proving Financial Hardship

Banks require full financial disclosure by a borrower interested in applying any of the workout alternatives to cure a mortgage default.

The kinds of financial information requested are

• Proof of Income
• Savings and Checking account balances
• Retirement Account values
• Income Tax Returns
• Value of jewelry, cars and other property
• Balances owed on credit cards, student loans, personal loans, etc…
• Household expenses (i.e. electricity, food, cable, etc…)
• Medical expenses
• School tuition and other education related expense
• Transportation and commuting expense
• Automobile expense (only if used for work or business)
• Alimony and Child Support
• Cost for care of elderly and/or ill parents

Since assembling all this information and putting into a format that Banks and Investors can understand is important for the success of having a short sale approved, a Real Estate Broker or Housing Counselor can produce the financial statements needed from the above information.

Of most importance to a lender is the net worth of the borrower.  While a short sale’s approval is not determined by a homeowners’ net worth, it will determine what a lender may ask a borrower to contribute if the proceeds do not satisfy a minimum amount of the mortgage balance owed.

Homeowner Advocacy

But if it were only as simple as assembling figures into a balance sheet, anyone would be able to make their case.  Fact is, the real work is done when a real estate broker or a housing counselor requests certain information from the Lender to make sure their records are correct.

Sending a lender an Authorization to Release Information requires the lender to cooperate with the party designated by the borrower in disclosing all information pertaining to the mortgage loan.

A Qualified Written Request normally accompanies the authorization to release information.  This request requires a lender to disclose the accounting records used by the mortgage servicer that evidences a mortgage default.

By disclosing the accounting used in the borrowers escrow account, a real estate broker or housing counselor can determine if the lender has cause to begin a lawsuit to foreclose on the property.

It’s at this point that the homeowner’s advocate will review the documents and information provided by the lender, their attorney and their mortgage servicer before they begin disclosing the borrowers financial position.

Why a real estate broker is a better advocate

While a housing counselor can be extremely helpful to delinquent borrowers in applying the other workout alternatives, a real estate broker is the only designee who can arrange a sale of the property.

A housing counselor can’t offer advice on the market value of the property without requiring the homeowner to pay for an appraisal, which still won’t offer any information on the probability of a market sale.

A real estate broker monitors the inventory of homes for sale, available financing , buyer demand and broker interest.

Which is why Banks prefer dealing with real estate brokers instead of housing counselors because they can

• List the property for sale at its current market value
• Licensed to arrange real estate sales where the property is located
• Offer the property through consumer and broker channels, and
• Negotiate a sale to contract that would get financing

A short sale isn’t easy

But compared to the other workout alternatives available for curing a mortgage default, a foreclosure short sale offers a homeowner the best option for mitigating a total loss in cooperation with a mortgage lender.

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Michael A. Corley is a licensed Real Estate Broker and Exec. Vice President at Corley Realty Group.  Born and raised in Bedford Stuyvesant, he now resides in Crown Heights with his wife and children