Under new guidelines set down by Fannie Mae and Freddie Mac, underwater borrowers who are seeking to sell their homes for less than what they owe must now receive decisions from their lenders within 60 business days. But if they are not careful, floundering borrowers can cause delays beyond the two-month deadline.
The new rules, which took effect June 15, apply only to loans owned or rolled into securities by Fannie and Freddie. But because the two mortgage giants are the main conduits between primary lenders and investors in mortgages, their precepts cut a wide swath.
More than 10 million homeowners are said to be underwater with their mortgages. Not all want to get out. Many are content with their current situations and have no intention of moving, at least for now. Others continue to hold on in hopes that values will start rising again.
Unfortunately, others need to go, and many of them would rather sell at a loss through a short sale — a loss their lenders would have to absorb — than have their homes taken away.
The new 60-day rule became necessary because lenders were taking an inordinate amount of time to make up their minds — eight months on average at one point, according to RealtyTrac, a foreclosure data firm. It took so long to receive an answer that many would-be buyers became tired of waiting for a decision and went elsewhere.
But borrowers need to realize that the rules cut both ways. While lenders are required to adhere to faster timelines, borrowers also must do their part. Otherwise, they can short-circuit their own short sale.
A decision can be delayed, for example, if all the paperwork the lender requires has not been supplied. If something as simple as a photocopy of a driver's license is missing, a borrower might have to start the process over, says Steven Horne of Wingspan Portfolio Advisors, a firm that services nonperforming loans.
Consequently, Horne and others agree that the most important thing a borrower can do is engage the services of a real estate professional or attorney who has experience in short sales, preferably with their particular lender. Not to bash rookies, but now is not the time to allow someone to cut his or her teeth on a deal.
"The way short sales are packaged and presented by real estate agents is more than half the battle," says Ed Delgado of WREN, the Wingspan affiliate that trains agents on how to package their short sales to speed up the process and gain approvals. "The more agents understand about how the process works, the fewer the delays and the faster the closings."
Matthew Vernon of Bank of America, which maintains a roster of experienced agents on its website (agentlocator.bankofamerica.com), agrees. "We get agents who are still learning the short-sale business, and that's never a good thing."
One good reason to have an agent who has a working familiarity with short sales is that, unlike a regular sale, the short sale is basically a two-step process. It's important to understand which step comes first.
Some lenders work the traditional way: Find a buyer, bring us the deal and we'll make a decision. But other lenders want borrowers to approach them first, come to an agreement on an acceptable price, and then find buyers at that figure.
"With some lenders, you can't just randomly list your house," Delgado says. The short sale can still be done, he says, but the timeline for closing is longer. "Usually people blame the lender for that, but often it's their own doing."
Complete and accurate financial information is critical, and the quicker a borrower completes the requested paperwork, the faster action can be taken.
It goes without saying that all forms should be filled out legibly, preferably typed. Pages get faxed back and forth several times, so if something is handwritten in pencil, it eventually will become illegible.
One key document is the hardship letter, in which the borrower states in his own words why he needs to sell at a price that undercuts the lender. "You don't need a novel," just a step-by-step explanation of how you got into financial difficulty, says Karen Mayfield, national sales manager at Bank of the West in San Francisco.
"Be precise; be clear," Mayfield advises. "Offer a bullet-point list in your own hand of the events that led to your hardship. If the lender can't understand how you got into trouble, he may close your file and move on to the next one. Or he may suspect you are trying to pull a fast one."
That leads to another important point: Make sure the hardship letter matches up with all the other documents provided. Those documents might include key medical records, a divorce decree or unemployment verification.
Other documents lenders may require include tax returns for the previous two years, bank statements for the previous two to six months, pay stubs for at least the previous 60 days, proof of residency in the form of a paid utility bill, a listing agreement and a third-party authorization allowing the lender to deal with the agent.
Gee Dunsten, a Salisbury, Md., agent and popular sales trainer, binds all these documents behind a cover letter and table of contents that "lets the lender know right away that everything it needs is included."
At some point in the short sale, borrowers have to justify the selling price, backing it up with a broker's price opinion or perhaps even an appraisal, a history of the listing that shows attempts to sell at a higher price, a report listing sales of other houses in the neighborhood, a sales contract with a preapproval letter from the buyer's lender and verification of his earnest money deposit and funds to close.
Dunsten likes to write a personal letter to his client's lender explaining the intricacies of the sale. "When it comes to short sales," he advises other agents, "the devil truly is in the details."
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