Help Speed Short Sales
Short sales can be less frustrating if you start the approval process early.
January 1, 2009
Although most U.S. families continue to benefit from homeownership, a small group of consumers in areas where home prices have declined is facing a difficult situation. These owners find themselves upside down, owning more on their mortgages than the present value.
When this loss in value is combined with accelerating loan payments or unexpected changes in a home owner's financial situation such as job loss or medical expenses, some families may be faced with the possibility of foreclosure.
In a number of instances, a short sale is the answer to this dilemma. Many lenders will consider a short sale only after retention-focused workout options—such as extending the loan term or reducing the interest rate—aren't sufficient to enable the home owner to afford the mortgage payments. In such cases, short sales are often the best option to help the home owner avoid foreclosure.
The challenge for many sellers and their real estate practitioners is finalizing a short sale quickly enough to prevent foreclosure. Short sales are complicated transactions that require approvals from a number of parties including the loan servicer, the loan investor, and the mortgage insurance company if there is one. If there's a second mortgage on the property, it can take additional time to get both the first and second lien holders in agreement.
Because of these complexities, it can be challenging to keep the process on track and moving forward. For that reason, many real estate practitioners avoid transactions involving a short sale. But there are ways to expedite the short-sale transactions considerably. As much as three-quarters of the work needed to finalize the transaction can be completed before the first buyer's offer is received.
Steps to Keeping Short Sales Moving
When considering a short sale, Wells Fargo Home Mortgage—like many lenders—requires borrowers to provide an application package containing a signed and dated financial worksheet, a hardship letter explaining why the borrower is unable to pay the current mortgage, and a letter authorizing the real estate sales associate to access information on the borrower's account.
We also require that the home owner's broker provide a fully executed listing agreement. An incomplete or inaccurate application can create processing delays, so it's critical that practitioners counsel their clients on the importance of completing the packet accurately and quickly.
Removing impediments that can slow the progress on short sales is equally important. For example, if the appraiser has difficulty accessing the interior of the property, it will take longer to complete the necessary valuation process for the lender. Similarly, home owners may need to provide a promissory note indicating their willingness to reimburse the mortgage insurance company for part of its exposure.
In some cases, the purchase offer can create delays. If the buyer's offer doesn't reflect current market conditions and comes in under fair market value, it may not meet the investor requirements and be denied. If the offer requires too many concessions from the seller, a lender may also reject it.
It's important to note that in some circumstances, market conditions are changing quickly, so what constitutes market value may shift. In addition, many purchase agreements have a 30-day time frame that allows buyers to withdraw an offer if it isn't accepted by that time. For both these reasons, it's critical to start the short sale approval process before the first offer comes in.
Otherwise home owners risk the necessity of resubmitting the entire short-sale package or starting the approval process over again.
Although short sales are seldom easy or stress-free, they definitely can be worth the effort for some customers. They can help provide home sellers—your clients and our customers—with a graceful exit strategy in an awkward situation.
Writer Cara Heiden is co-president of Wells Fargo Home Mortgage. She oversees the business and strategic direction of the mortgage division and is responsible for national consumer lending, correspondent and wholesale lending, loan servicing and post-closing, consumer marketing, customer retention, cross selling, and ventures. She can be reached at shortsaleQA@wellsfargo.com.
Updated: September 20, 2019