FHA 101

FHA 101

As anyone familiar with Short Sales will tell you, The Investor makes all the decisions.  That’s why it’s absolutely crucial to know who the Investor is, and what type of loan is being serviced.  Investor types vary widely, from Private Investors all the way to Government Investors.  Especially in this market, Government Investors are becoming more and more common, as FDMC & FNMA buy up more delinquent loans.   Because there are so many factors that come into play when determining the applicable Investor rules, I will only discuss 1 Investor:  FHA

FHA (Federal Housing Administration, is a division of the US Department of HUD (Housing & Urban Development), and has been insuring Home loans for years.  They offer some of the best mortgage terms out there, and have many programs available to suit nearly every type of Buyer.  Most FHA loans you will run into will be 30yr fixed, although the specific type does not matter when you are negotiating the Short Sale.  What you have to remember & keep in mind, is that ALL FHA loans must be serviced the same way, by law.

So, you’ve found a Homeowner needing help with a Short Sale, and they have an FHA loan.  Now what? Well, your first priority should be to have the Homeowner contact the Lender, and verbally verify/request their wish to pursue a Short Sale.  Thankfully, FHA does not require a Purchase Offer prior to beginning the Short Sale!

Once the Lender opens the file for the Short Sale, FHA mandates an appraisal be performed, to determine the property’s value.  Next, FHA (via the lender) will issue an “Approval to Participate,” which officially enters the Homeowner into the Short Sale program.  The ATP will not only give you Short Sale Pre-Approval terms (letting you know exactly what the Bank wants to NET), but will also start the 4-month program time clock.  The 4mth clock is important to understand, because the longer the property is listed with no offer, the less NET the Bank will require. Want a copy of the Appraisal?  No Problem!  FHA requires a copy of the Appraisal be sent to the Homeowner or Listing Agent, upon request!

Seems easy enough, right?  Well, there are many other FHA guidelines & stipulations that need to be met before you can close.  Some guidelines, such as the required Listing Contract Disclosure,

“Seller may cancel this Agreement prior to the ending date of the listing period without advance notice to the Broker, and without payment of a commission or any other consideration if the property is conveyed to the mortgage insurer or the mortgage holder.  The Sale completion is subject to approval by the mortgagee.”

Is not readily caught by your worker, or verified to being met until late in the game, and can cause unnecessary delay.  Make sure you already have this disclosure in place before you begin with the Bank.

Other guidelines will relate to the prospective Buyer, and still others will relate to whether the Homeowner is even eligible for the FHA Short Sale program.  Understanding the Guideline particulars will help you save VAST amounts of time. For example, If you know that FHA will only allow 1% Concession, but the Buyer absolutely has to have 5% concession, then you can save time by getting the Offer in line prior to submittal (instead of waiting for the Bank to tell you a 5% concession is too much).

Is the Bank taking too long to respond to an Offer?  Did you know FHA requires the mortgagee (bank) to Approve or Deny the Offer within 5 Business days??  If you aren’t up to date on FHA guidelines & rules, you can unknowingly burn months of time! Banks have extremely high employee turnovers, & each worker has hundreds of other files on their desk, and their motivation to understand specific rules is low.  Their job is to turn & burn.  Your job is to make sure they are doing their job, per FHA guidelines.

FHA Guidelines are public knowledge, and are available on FHA’s website (http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/2008ml.cfm).  HUD Mortgagee Letter 2008-43 will be your best friend.  Learn it, know it, and you will be unstoppable!!

Top 5 Reasons Short Sales Fail

Top 5 Reasons Short Sales Fail

1. Value Discrepancy:  The most common reason Short Sale's fail is because Lenders & their investors are uninformed or incorrectly informed about the Subject Property's value.  More specifically, this problem arises from the BPO Agent or Appraiser hired by the Bank.  Most Lenders will order a full Appraisal, however sometimes only a "Drive-By" will be performed. If the Agent gives a inflated Value to the property, the Short Sale can be stalled for months!  As most Lenders are not authorized to perform more than 1 valuation in a given amount of time, it is absolutely imperative that the valuation be performed properly & accurately the first time
2. Bank Worker:  The Loss Mitigation workers at the Banks are very busy, and sometimes have literally hundreds of other Short Sale files on their desk.  They do not have the time to waste on incomplete files, or insufficient offers. It is the Bank's job to maximize their Investor's payoff, so Workers can be very gruff and unfriendly.  Because of this and poor knowledge base (due to high worker turn-over), it is our responsibility to make their jobs as easy & streamlined as possible. The more work the Banker needs to do, the higher chance of the Short Sale failing.
3. Insufficient Time: The third most common reason Short Sales fail is because there is not enough time to facilitate. Time delay can arise from Financial/Document request, Offer review time, looming Auction date, and others.  Frequently, the looming auction date is the culprit, as the Bank needs sufficient time (~2 weeks) to set the Short Sale file up, and request the Auction postponement. Since postponements are never guaranteed, it is vital to be as responsive as possible to any Bank/Investor requests.
4. Document Delay: This is more or less self-explanatory.  Since Loss Mitigation workers have many other files, they cannot waste time on incomplete packages. Furthermore, since Banks are inundated with Short Sale request, they have very strict servicing guidelines to adhere to.  Lenders & Investors cannot keep Short Sale files open indefinitely, and because of the offer review time-frame, updated financials & documents are needed constantly.  Once a document request is made, most workers will only keep the file open for 3-5 business days, and will close the file immediately if a timely response is not received. 
5. Investor Rules: Even when everything is done by the book; the offer is good, the property isn't going to auction, all Junior Lien-holders have signed off, etc, the Short Sale can still denied! Investors have tons of guidelines and stipulations that must be met in order for them to feel happy about the Short Sale. Despite the best efforts, Investor guidelines are generally non-negotiable. For example, most Investors will have caps on how much $$ a Junior can receive, and sometimes the Junior's Investor is unable to accept such a settlement, consequently forcing a Foreclosure Auction.  It is in these minor points & guidelines where deals can be won or lost, so it is important to know who the Bank is working for!

HOW-TO: Submit a ShortSale Offer

HOW-TO: Submit a ShortSale Offer

Many of us have seen "ShortSale" or "Pre-Foreclosure" properties for sale through the MLS, but are unsure of the next steps, or how to market these properties to prospective Buyers.

As you may or may not know, most ShortSale Lenders will require the Property to be listed on the MLS, prior to entering the Homeowner into a ShortSale program.   Because of this, it's safe to assume that any "ShortSale" or "Pre-Foreclosure" Property listed as "Active" in the MLS is waiting & ready for an offer.  Once a viable offer is received, many Listing Agents will change their listing to "Pending," and will only accept Back-ups.  Knowing when & how to submit your Buyer's Offer on a ShortSale property is absolutely vital information.

1. Inform the Buyer about what a ShortSale is, the processes involved, and the associated Time-Frames.
2. Find prospective "ShortSale" or "Pre-Foreclosure" property on MLS.
3. Schedule an immediate showing (within 24-48hrs).  **Most S/S Properties are GREAT deals, and will not last.
4. Acquire pertinent information from Listing Agent.  (Lender, # of Liens/Mortgages on Title, Type of Loan, etc).
5. Inform & discuss situation with Buyer, and how to structure their offer so as to have best chance of success.  **Some Lender's Investors will only allow a certain amount for Concessions, and some will only allow concessions under certain circumstances.
6. Acquire Buyer's "Proof of Funds," or "Pre-Qualification Letter" from their Mortgage Company.
7. Submit Offer & "Proof of Funds" to Listing Agent as quick as possible, so as not to lose the deal.
8. BE PATIENT!  **Do not be fooled by the term "Short;" most ShortSales will take months to facilitate.

Keep in mind that the Loss Mitigation worker who reviews the Offers, will have literally Hundreds of other files on their desk, and will not waste time on insufficient offers.  If the Offer is not at least worth reviewing, the Lender will issue an immediate "NO."  If your Buyer has submitted a decent/good Offer, it is typical to not get a response for a couple weeks, so don't get discouraged!