Mar 13, 2016
A Homeowner's Guide To
Short Sales
Getting Out While Remaining Sane
Kris Lindahl
A Homeowner's Guide to Short Sales i
Disclaimer
The information contained in this book is for general guidance on matters of
interest only. The application and impact of laws can vary widely, based on
the specific facts involved. Given the changing nature of laws, rules and
regulations, there may be omissions or inaccuracies in information contained
in this book.
Accordingly, the information in this book is provided with the understanding
that the author and publisher are not herein engaged in rendering legal,
accounting, tax, or other professional advice and services.
As such, it should not be used as a substitute for consultation with
professional accounting, tax, legal or other competent advisers. Before
making any decision or taking any action, you should consult with the
necessary professionals.
A Homeowner's Guide to Short Sales ii
Copyright
Published by: Kris Lindahl.
All rights reserved. No part of this book may be reproduced or transmitted in
any form or by any means without express written permission of the author,
except for the inclusion of brief quotations with mention of the author for use in
a review of this book. To request any permission, contact the author.
A Homeowner's Guide to Short Sales iii
About the Author
So, what qualifies me to not only give short sale advice, but also to write a
book on the subject? Two reasons stand out, overall.
First, I am an active real estate agent, licensed in Minnesota and
Wisconsin, dealing with short sales on a
weekly basis. I have learned the nuances of
the process by actually using them during the
course of serving my clients. I know enough
about the process to – well – to fill a book.
The second reason that I think you‟ll want to
pay attention to the information in this book is
that I am the leading short sale agent with the
leading Minnesota brokerage, Edina Realty.
Finally, I have received extensive training in
not only helping distressed homeowners, but in
dealing with lending institutions as well.
Throughout my tenure as my broker‟s leading short sale agent, I‟ve built an
extensive database of the direct telephone lines to the decision-makers at all
of the major lending institutions. This network is vital to making sure your
short sale paperwork doesn‟t sit at the bottom of the pile on every bank‟s short
sale negotiator's desk.
While I don‟t find myself all that interesting, and I don‟t like to brag, I do feel
the need to let you know that I am qualified to not only help you personally
through the short sale process, but to write about it as well.
A Homeowner's Guide to Short Sales iv
With that said, I‟ll show you my credentials and then we‟ll get to the real
business of this book: everything you need to know about short sales.
Five Star Short Sale Certified.
Equator REO Certified (Platinum).
Equator Short Sale Certified (Platinum).
Res.net Short Sale Certified.
Res.net REO Certified.
Certified Short Sale Expert.
CRS (Certified Residential Specialist).
Preferred Wells Fargo Short Sale Agent.
Preferred Bank of America Short Sale Agent.
As you read this book, I‟ll be sharing (with their permission) some of my
clients‟ personal experiences with the short sale process. I hope to show you
that, while you may be feeling alone, and maybe even embarrassed, there is
life after a short sale. My aim is to get you there.
Best Regards,
A Homeowner's Guide to Short Sales v
In The Kris Lindahl Team We Trust
"Kris Lindahl has formed a technology-based real estate powerhouse in the
Twin Cities area of Minnesota."
REALESTATE.COM
"Kris turned what was beginning to look like a nightmare short sale into a
smooth one. His experience, network of contacts and easy-going manner
made our short sale happen much quicker than we expected. Thanks, Kris."
MONTY AND LILY V. - BLAINE, MN
"You guys were great. Being a single mom, I was a bit scared and
overwhelmed with the whole foreclosure and short sale process. I checked
my credit report last week and it only dropped 20 points! The best part is, you
guys were successful in getting my $120,000 deficiency judgment waived."
AMY S. –NEW BRIGHTON, MN
“Kris Lindahl is one of the leaders in the country with Wells Fargo short sale loans, and has a proven record in getting short sale loans approved."
VIRTUALSTRATEGY.COM
"Thank you so much for all of your hard work. I would recommend you to everyone that is in a short sale situation. Your expertise with short sales is truly worth noting."
NICK AND HANNAH H. - MINNEAPOLIS, MN.
"I concur with your short sale expert claim. Your team is a well-oiled
machine. If someone in Minnesota is thinking about doing a short sale and
A Homeowner's Guide to Short Sales vi
they are unsure where to start, the first thing they should do is call Kris.This
guy knows the ins and outs of the short sale process. Thanks!"
TOM B. - ST. PAUL, MN
"Well done guys! Thanks for allowing me to sleep at night. I tried contacting
my lender for months to get a loan modification with no success. These guys
were able to get my short sale done in 35 days. I only had 60 days left in my
redemption period. These guys stepped up to help when I needed it most.”
JULIE R. - EDINA, MN
"All I can say is thank you. You were the third company I talked to about
short sales. Your professionalism along with your helpfulness separated you
guys from all other companies. I am glad I made the decision that I did. You
guys truly cared about my outcome. I am so happy to have no deficiency
judgment!"
SHARI D. - MINNETONKA, MN
"I can’t thank you enough for all of the help. Your communication made me
comfortable with the whole short sale process. I have recommended you to
my other family and friends going through these same tough times."
JAMES T. - SHAKOPEE, MN.
"You guys make up quite the team. Our short sales were extremely
complicated with all of the other real estate we owned. Your attorney was able
to sort through all of our real estate and makes this process seem easy. I think
the greatest part of our short sales was we had zero out of pocket. These
guys really do fight for your best interest. Two thumbs up!!!"
JONATHAN AND DEBBIE L. - APPLE VALLEY, LAKEVILLE, PRIOR LAKE, MN
A Homeowner's Guide to Short Sales vii
“Newman's first law: It is useless to put on
your brakes when you're upside down.”
—Paul Newman
A Homeowner's Guide to Short Sales viii
Table of Contents
Chapter 1: What is a Short Sale? 1 Short Sales, Then and Now • Why Would a Bank Agree to a Short Sale? • Why Banks Deny
Some Short Sales
Chapter 2: Advantages and Disadvantages of the Short Sale 4
Tax Ramifications • Credit Impact • When Can I Buy Another Home?
Chapter 3: How to Qualify for a Short Sale 7
How Do I Qualify for a Short Sale? • Too Much Month at the End of the Money • Writing
the Sob Story
Chapter 4: The Traditional Short Sale: Step-by-Step 10
Hiring an Agent • Contacting the Lender • The Short Sale Package • Getting the
House from Listed to Sold
Chapter 5: Choose Your Real Estate Agent Carefully 15
Why the Agent You Hire is the Most Critical Step in the Process
Chapter 6: The HAFA Short Sale 20
What is HAFA? • Advantages of a HAFA Short Sale • Disadvantages of a HAFA
Short Sale
Chapter 7: FHA Short Sales 24
How is a FHA Short Sale Different? • The Rules • Am I Eligible?
Chapter 8: VA Short Sales 27
Am I Eligible? • What Are the Requirements? • Taking the Steps
Chapter 9: Private Mortgage Insurance and the Short Sale 30
What is PMI? • How Will it Affect My Short Sale? • The Good News
Chapter 10: Tax Ramifications of the Short Sale 33
Will the IRS Come After Me?
Chapter 11: Should I Wait for the Market to Recover? 35
How Long Will it Take for My Home to be Worth What I Owe?
Afterword 39
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Appendix i: Duties of the Short Sale Listing Agent 40
Appendix ii: Questions to Ask in the Real Estate Agent Interview 42
Appendix iii: Contents of the Short Sale Package 43
Appendix iv: Letter of Authorization 44
Appendix v: Sample Hardship Letter 45
Appendix vi: Homeowner Financial Worksheet 46
Appendix vii: Short Sale Contingency Addendum 48
Appendix viii: Short Sale Glossary 50
A Homeowner's Guide to Short Sales x
Introduction
“Foreclosure avoidance” may just be the real estate buzz phrase of the
new millennium. An entire cottage industry has sprung up, offering distressed
homeowners a variety of remedies to help save their homes and their credit
ratings.
While visions of riches dance in the heads of the masterminds of these new
industries, homeowners who can no longer make their mortgage payments –
for any number of reasons – sink ever deeper into despair and confusion.
What to do? Where to turn for help and information?
Probably the most heartbreaking moment in the process is when the
homeowner, already distressed over not being able to meet his mortgage
obligation, attempts to sell the home to get out from under the financial
burden, only to learn that his home is worth far less than what he owes the
lender.
This financial position is known as being "upside down" or “underwater” on
the mortgage, and it aptly describes the distressed homeowner‟s feeling of
drowning in a debt she cannot pay.
I know it feels as if you‟re completely alone in this underwater nightmare
but, believe me, you‟re not. National news articles are full of stories about
everyday folks on the brink of foreclosure. Even the rich and famous haven‟t
escaped the real estate Grim Reaper.
For example, the NBA‟s Allen Iverson and both the NFL‟s JaMarcus Russell
and Terrell Owens all experienced close encounters with foreclosure, and
were saved by the short sale process.
A Homeowner's Guide to Short Sales xi
Knowing you‟re not alone in this situation most likely brings little solace.
However, realizing how so many Americans got here helps make sense of the
situation.
From 2006 to 2009, our housing market saw a 30 percent decrease in
home values. Couple that with the recession that brought about high
unemployment rates, and the recipe for disaster for millions of American
homeowners was complete.
I have helped many people avoid foreclosure by steering them through the
sometimes perilous short sale process. While you‟ll find shelves of books that
teach investors how to profit from the misery of the unfortunate short seller, I
decided to devote this book to assisting the homeowner during what might be
the most stressful period of his life.
Remember, above all else – with the possibility of foreclosure ever looming
for those that miss mortgage payments – time is of the essence if we are to
get your home sold. That said, I hope you will take the time to read through
the short sale process to become better acquainted with what lies ahead.
A Homeowner's Guide to Short Sales 1
Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 1: What is a Short Sale?
In this chapter, we'll take a look at short sales, then and now (i.e., how they've evolved
over the past five years or so). I will answer the question: "Why would a bank agree to a
short sale?" You will learn why banks deny some short sales.
So, what is a short sale? Maybe it‟s easier to tell you what a
short sale isn‟t: short. There is nothing about the entire process
that is easy or quick, which you‟ll realize as you learn more about
it.
A real estate short sale is a type of real estate transaction
wherein the lender agrees to accept a payoff of your mortgage
that amounts to less than what you owe.
Now, why on earth would anyone agree to write off such
substantial sums of money? There are several reasons, the most
significant of which is that if the lender doesn‟t agree to a short
sale, there is a high likelihood that the property will end up in
foreclosure. Lenders don‟t like foreclosures for the following
reasons:
Lenders are in the business to loan money, not to carry a portfolio of real estate
holdings.
Studies show that lenders realize more money from the short sale than they do
when a property is sold after foreclosure. This is mainly due to the fact that homes
that are occupied by a homeowner are in far better condition than vacant homes.
The short sale requires fewer of the lender‟s resources, since the homeowner and
The Typical Short Sale
The homeowner purchases a
$300,000 home, with 5 percent
down, just before the real estate
market tanks.
He loses his job and can no longer
make his $1,662.50 per month
mortgage payments, so he decides
to sell the home.
In the meantime, property values in
his area depreciate by 30 percent,
and the current market value of the
home is now $210,000. Yet he owes
his lender most of the original
$285,000 debt.
The homeowner is upside down in
his mortgage, to the tune of
$75,000.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
his or her agent take over the marketing duties.
A short sale helps the lender avoid the legal costs incurred from foreclosing on a
home.
Real-estate-owned properties (REO) – those the lenders take back when they fail to
sell at a foreclosure auction – are expensive to maintain, insure and secure until
they sell.
Lenders didn‟t “get” this until a few years ago. Back in 2008, when both the job and
housing markets imploded, lenders weren‟t quite sure what to do with the massive number
of borrowers that couldn‟t make their mortgage payments, and frequently made decisions
that ran counter to their best interests. In fact, although I haven‟t conducted a scientific
study, I would be willing to wager that many lenders lost billions of dollars due to such
ignorance.
A good example of this comes from an agent friend of mine in Las Vegas. He told me a
story about a client he worked with back in 2008. She – let‟s call her Chris – had an
adjustable rate mortgage and, as fate would have it, the rate adjusted just as her boyfriend
decided to move out of the house, sticking Chris with the entire mortgage payment. Now,
this wasn‟t a tiny hike in her payment. Chris‟s mortgage payment went from around $1,600
to $2,200 a month.
Again, fate stepped in, and because the recession brought tourism in Vegas almost to a
standstill, Chris was laid off from her bartending job in a well-known, high-end casino. So,
here she is with no job, no job prospects, and a $2,200 a month mortgage payment.
The first thing Chris did was call her lender. While today this might be a smart move,
back in 2008, it got her nowhere. She begged, she pleaded, she beseeched – over a
period of weeks – to get her lender to work with her on adjusting her loan to make it more
affordable while she found employment. No dice. The lender simply would not budge, and
made it quite clear that foreclosure was looming.
Finally, Chris decided to try a short sale. She hired my friend (the Vegas real estate
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
agent), and finally sold the home for $114,000. Her loan balance? $356,000.
If the lender had worked with Chris on modifying her loan, the lender wouldn‟t have lost
$242,000. Had the lender actually proceeded with foreclosure, which was exactly what
they planned, the home would have lost even more value. Shortsightedness, thy name is
lender – at least back in 2008.
Thankfully, the situation is different today. Lenders have learned, through situations such
as Chris‟s, how to deal with underwater homeowners. Be that as it may, not all
homeowners are provided the short sale opportunity. Why would a lender deny a short
sale request? Here are a few reasons:
The mortgage holder believes it will have a qualified buyer at auction.
The offer to purchase is too low.
The short sale package is incomplete.
The homeowner has enough assets to work out a repayment plan with the lender.
The buyer doesn‟t qualify for a loan.
The lender sold your loan, and no longer retains the authority to approve a short
sale.
That said, short sale denials are rare. The value of the home, the homeowner‟s
hardship, and the buyer‟s qualifications are top priorities when lenders determine whether
or not to grant a short sale.
If you qualify for a short sale, and have an experienced short sale expert at the helm,
you should have nothing to worry about.
A Homeowner's Guide to Short Sales 4
Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 2: Advantages and Disadvantages of the Short Sale
It‟s bad enough to feel like you are perched on the edge of homelessness; but then to
be told that all of your options to avoid this disaster will, in one way or another, impact your
credit or add to your tax burden, is downright frightening. Since we‟re discussing just one
of your options when faced with foreclosure, let‟s look at the advantages and
disadvantages of the short sale.
Short Sale Disadvantages
The Lender May Foreclose Anyway
It ain‟t over „til the fat lender sings. In other words, you can still lose your home to
foreclosure during the short sale process. The mere fact that your home is on the market
won‟t stop your lender from pursuing delinquent payments, or even resorting to
foreclosure. Time is, once again, of the essence when you fall behind on your house
payments and decide to short sell. We need to act quickly and efficiently.
You Are Not in Control
The lender and its loan servicer are in charge of the transaction. You may think the offer
to purchase your home is sterling, but the lender may feel otherwise. Even though you are
the first to accept offers, those offers may be declined by the lender.
All That Work and No Money
Let‟s say that your best friend is putting her house on the market. Would you volunteer
to do it for her? Would you take on the responsibility of cleaning, repairing, staging, hiring
an agent and keeping the home immaculate for showings to get the home sold? Would
you do so, knowing full well you wouldn't get a dime for all of your hard work?
That‟s the short sale, in a nutshell. You will do all the work while the lender gets all the
money. It‟s a tradeoff that you must accept, unless you want to spend the entire time the
home is on the market feeling cheated and resentful.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Time Intensive
A short sale is time consuming. Even with recent legislation aimed at speeding up the
process, it still moves at a snail‟s pace. In fact, the average time between the beginning of
the short sale process to the close of escrow is 16.6 weeks, according to the National
Association of Realtors.
Because the short sales that I helm typically take far less time than that, I‟m of the belief
that most of these protracted transactions are led by inexperienced real estate agents that
lack a network of contacts with the largest lenders.
Agents that aren‟t familiar with the process find themselves in way over their heads,
“stuff” falls through the cracks, and the whole process takes longer than it should – if the
deal doesn‟t completely fall apart.
The Credit Impact
Short sales impact credit ratings; there is no getting
around that. First, there is the matter of the delinquent
mortgage payments – late payments have a huge impact
on your credit. Since a lender typically won‟t approve a
short sale unless you‟ve missed payments, the first credit
ding is inherent in the process.
While the Fair Isaac Company (more commonly known
as FICO) is just one company responsible for determining
your credit score, it is the company most lenders use.
Employing a complicated formula, they use data submitted
to them by the "big three" credit tracking and reporting
agencies: Equifax, TransUnion and Experian.
The credit reporting agencies have no standard method
of reporting foreclosures, short sales and deeds-in-lieu of
foreclosure; thus, they generally report all three as “Debt
not paid as agreed.” FICO, therefore, has no way of knowing whether you foreclosed,
Fix Your Credit After
the Short Sale
Sure, it feels like you’ll never have
even a barely passable credit score
again after a short sale. You might
be surprised, though, by how quickly
you can rehabilitate your credit.
Studies show that even scores
that drop to 625 can be raised to
over 700 in as few as nine months
after the short sale.
Bring your debts current as
quickly as possible, and keep them
current for nine months.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
used a short sale, or gave the deed back to the lender in lieu of foreclosure. This is why
short sales have the same impact on credit scores as foreclosures. Read on, though, and
you'll find out why the short sale is actually better for your future credit than a foreclosure.
That said, one of the items FICO scrutinizes when compiling your score is your payment
history. Therefore, the number of late mortgage payments will impact your score.
Tax Ramifications
Time is of the essence. I know I‟ve said this several times, but I need to say it again,
especially if you‟re considering a short sale. Make the move, right now. Unless Congress
steps forward before the end of 2012, the Mortgage Forgiveness Debt Relief Act will
expire. If it does, the tax ramifications of a short sale may be quite painful. (I discuss this in
depth in Chapter 10.)
Short Sale Advantages
If your mama was anything like mine, she most likely pointed out to you, over and over,
that every dark cloud has a silver lining. The short sale "dark cloud" is no different.
Although you‟re in an untenable situation, when choosing whether or not to undertake a
short sale, it‟s a good idea to know the best of this bad situation.
Avoid the Alternatives
Choosing to short sale your home, provided you begin the process in a timely fashion,
allows you to avoid some of the more onerous options, such as bankruptcy and
foreclosure.
Buy Another Home Sooner
When you read that a short sale is “better for your credit” than a foreclosure, what the
confused writer is trying to say is that, although the short sale impacts your credit score in
the same way as a foreclosure, it is viewed by lenders more favorably. The waiting period
to purchase a new home, under Fannie Mae guidelines, is three years after performing a
short sale. After a foreclosure? You may have to wait anywhere from five to seven years.
A Homeowner's Guide to Short Sales 7
Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 3: How to Qualify for a Short Sale
The short sale qualification process has evolved over the years, and common
misconceptions persist. Let's see if I can clear these up by giving you the facts.
The three qualification guidelines most lenders demand include:
Insolvency – If you hold major assets, you will be expected to dissolve them to pay
down your debt to the lender.
Financial hardship – You are unable to meet your current monthly mortgage
payments.
Insufficient equity – The proceeds from the sale of the home at current market value
are insufficient to pay what you currently owe on the property.
Let‟s take a closer look at these guidelines.
Insolvency
While the word may conjure images of the unfortunate guy that lives under the freeway
overpass, insolvency simply means that your debt exceeds your assets. What the lender is
looking for when considering insolvency is whether you have any means to pay down the
deficiency after the short sale. If you own a boat, stocks, or have any other assets, you will
be expected to liquidate them to help pay down the balance of the loan.
This is not to say that you must be flat broke and ready to join the guy under the
freeway; only that the lender is assured that your financial situation isn‟t going to improve
any time soon. Money in the bank to cover basic living expenses won‟t disqualify you from
a short sale.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Financial Hardship
Your lender wants to know how you got into this pickle.
What hardship came about that makes it impossible for you
to pay your mortgage?
Now, one man‟s hardship may be another‟s minor
annoyance. A famous athlete that has his multi-million
dollar per year contract cut in half is still amazingly wealthy,
but that cut in his finances is a hardship, just as it is to the
single mom who loses her well-paying job and is now
working for minimum wage.
The most common hardships that befall homeowners are
the loss of a job or a reduction in income, medical
problems and the ensuing bills, involuntary job transfer,
and the death of a spouse or other person who contributed
to the household‟s income.
Insufficient Equity
While it‟s tempting to many homeowners, a lender typically won‟t grant a short sale
simply because you no longer want to make payments on a house that‟s lost a significant
portion of its value. If you have the means to make your payments, or pay the shortfall,
believe me, your lender won‟t entertain a short sale.
When a borrower is insolvent and proves a valid hardship, the lender next looks to how
much money the house will bring on the current market. This requires the compilation of a
broker‟s price opinion (BPO), an analysis of the home's current market value.
Market value is simply what a buyer is willing to pay for the home. The only way we can
determine this amount is by comparing your house with those that have sold over the past
several months. (These are called “comps,” short for "comparables").
Comparable is the operative word here. Although your home may be lovely, it isn‟t worth
the same amount of money as a home that is larger, newer, or in better condition, with in-
Acceptable Hardships
Loss of income, divorce, job
transfer, major illness,
unexpected medical expenses
and the death of a spouse
qualify as hardships.
Military deployment,
incarceration, and divorce are
also valid hardships.
Pregnancy or adoption
(increasing the size of your
family) is typically not
considered a hardship.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
demand amenities.
After compiling a list of several comps within close proximity to the subject property (i.e.,
your house), the homes are compared according to age, size, condition and upgrades. In
other words, a three-bedroom home is generally not worth as much as a five-bedroom
home. A 4,500 square foot home is worth far more than a 1,200 square foot home. A
remodeled home is typically going to sell for more than a fixer-upper.
Of course, if the three-bedroom home has been completely remodeled with an
expanded kitchen and new "everything," it will sell for more than the five-bedroom fixer-
upper. The process of determining current market value is complicated, and it requires an
agent that is experienced in the procedure.
Once we know the current market value of your home, we‟ll deduct that amount from
what you owe on the house. If the result is a positive number: Congratulations – you have
equity!
On the other hand, if the result is a negative number, you have insufficient equity to pay
off your debt with the lender.
Now that you know whether or not you qualify for a short sale, let‟s dive into the process.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 4: The Traditional Short Sale: Step-by-Step
The short sale transaction is very much like a traditional real estate transaction with a
few exceptions. These exceptions, however, cause short sale transactions to be
cumbersome and protracted. The more people involved in any process will typically slow it
down, and, unlike a conventional sale, there are teams of people involved in a short sale.
Like any process, however, there are certain steps that must be taken to arrive at a
successful conclusion.
Step 1: Determine Who Owns Your Loan
The only way to determine which short sale program you need is to find out who owns
your loan. Get out your payment booklet or statement and have it handy when you meet
with your real estate agent for the first time. Your agent will find out what type of loan you
have and who owns it. Sometimes the bank you make payments to is merely a servicer,
and doesn‟t own your loan. This is important information to help you determine whether
you need to do a HAFA short sale, an FHA short sale or a conventional short sale.
Step 2: Hire a Proven, Certified Short Sale Listing Agent
Read any book or any article by any expert on short sales, and notice the typically large
amount of time the author spends addressing the topic of hiring a real estate agent. This is
the most important step you will take, as your agent can literally make or break the deal.
(We‟ll take a closer look at the process in Chapter 5).
Avoid any agent who has a “day job” and works in real estate part-time. Avoid agents
who have never handled a short sale, as well as those who have only handled a few. Only
agents that perform shorts sales on a regular basis can keep up with the ever-changing
guidelines and necessary strategies to get the deal done quickly to avoid foreclosure. Only
a high-volume short sale agent has the inside connections at various lenders to help
facilitate a quick process.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Step 3: The Agent Contacts Your Lender
The first thing I will do is prepare the Authorization Letter, a copy of which you will find in
Appendix iv. By signing this form, you, the homeowner, authorize the lender to release
information to me, which allows me to communicate with the lender on your behalf.
Examples of information that I may need to facilitate your short sale include:
Your lender‟s requirements for a short sale.
Information about your loan.
The status of foreclosure proceedings, if any.
Step 4: Prepare the Short Sale Package
The short sale package contains all the documents your lender requires to determine
whether you, the home, and the buyer qualify for a short sale.
To save time, I counsel my short sale clients to gather all of his or her required short sale
package documents well in advance of when we will need to submit. That way, when we
receive an offer, we won‟t waste time compiling the package. (See Appendix iii for a list of
the contents of a typical short sale package).
Step 5: Market the Property
Your listing agent, if you choose wisely, will market the home as he or she markets all of
her other listings. This includes, at the very least, photographing the home and entering
the home‟s information into the Multiple Listing Service database.
I typically go above and beyond what other area agents do. Since I‟m known as
somewhat of a tech nerd, my listings generally end up on the first page of Internet search
engine results, causing the home to receive far more exposure than it would had it been
listed with another agent. Again, I am not trying to toot my own horn here. In fact, the
lender requires proof that all the proverbial stops were pulled out in the marketing of the
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
short sale listing.
Step 6: Show the Property
Showing your home to potential buyers is a team effort between you, me and the
buyer‟s agent.
Your job as a member of this team is to ensure that the house is in top shape while it‟s
on the market: Clean, de-clutter and snazz up the curb appeal.
My job is, of course, to field calls from buyer‟s agents, and ensure that all potential
buyers actually have the credentials and money for loan approval.
The buyer‟s agent‟s job is, naturally, to bring in the buyer and keep her motivated during
the transaction.
Step 7: Negotiate with Buyers
This is my job and – ok, I am tooting my own horn here – I‟m darn good at this. While
certain negotiating techniques can be learned, tenacious negotiators and dealmakers are
born, not made. I happen to enjoy the art of the deal, thus, I have honed my negotiating
skills over the years to ensure my clients get the best deal possible.
Step 8: Agent Submits the Short Sale Package
Once we have an accepted offer, the purchase agreement and all addenda are added to
the short sale package; then off it goes to the lender. My job is far from over, however, as I
have to keep tabs on which stage of the process your file is in on a weekly basis. This
entails making lots of phone calls to my network of contacts at the various lenders.
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Step 9: The Lender’s Processor
Keep in mind that your short sale package is most likely not the only one arriving at the
lender on any given day. Yours, as well as others, will end up with the processor who is
responsible for performing a complete audit, ensuring all required documentation is
included. Your information is then added to the lender‟s system. It may take up to one
month for your file to leave the processor and head over to the negotiator.
Step 10: The Lender’s Negotiator
The lender's negotiator is responsible for the negotiations on the lender‟s end, negotiating
the short sale on behalf of the lender. (This person used to be known as the “loss mitigator,”
but is now typically called “the negotiator”). Your short sale package will land on the
negotiator's desk after being entered into the system.
Keep in mind that the negotiator does not have the power to make the final decision. His
or her sole aim is to determine:
Whether you have assets that can be contributed to pay down the loan balance.
The value of the house.
How to negotiate for the most money the lender can realize in the sale.
Once the negotiator receives the best deal for the lender, and the lender approves, the
negotiator will send me a letter, confirming approval. At that time, we open escrow.
Step 11: The Escrow Process
When the lender officially accepts the offer, the buyer's agent collects his or her client's
earnest money deposit and places it in the listing broker's trust account.
Think of the title company as an unbiased third party that collects the money and all of
the documents required for the transfer of the property. Most of this activity happens
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behind the scenes for both the seller and the buyer. The title company will perform the
closing, and usually gives the seller the option to pre-sign ahead of time to avoid sitting at
a closing with the buyer.
Step 12: Closing
In the meantime, your lender will assign a closer to the file. The closer works to close
the deal on the short sale bank's behalf. Most short sale banks require that they be
provided the final HUD-1 (Settlement Statement) 48 to 72 hours before closing to ensure
that all the information matches the data contained in the approval letter they originally
issued.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 5: Choose Your Real Estate Agent Carefully
According to the National Association of Realtors, 90 percent of their members
perform only one to four real estate transactions a year. Read that again – it‟s astounding!
In any profession, practice makes perfect. Those that do the work consistently, over
time, become experts. While many of these part-time agents may be perfectly capable of
steering a traditional real estate transaction to a close, it‟s doubtful they have the
knowledge to do the same with a short sale.
LeBron James walks onto a basketball court and makes the game look effortless. He
doesn‟t do that by playing one to four times a year. He didn‟t become an expert at his craft
without doing what he does over and over on a daily basis – for years – until the process
became second nature.
It‟s the same with short sale listing agents. Only those that have successfully handled a
large amount of short sale transactions should be considered experts or, as so many
agents label themselves, “short sale specialists” (even though they aren't). Only the agent
that handles short sales on a weekly basis is up-to-date on the latest rules and systems
and has built a network of lender contacts.
Speaking of which, avoid the agent that lacks relationships with asset managers at the
various big lenders. The time it will take that agent to determine who will handle the short
sale, how to reach this person, and finally speak with him or her to obtain a signature on
the authorization form, is time wasted. And, as you‟ll recall, in a short sale, time is of the
essence.
The Dreaded Deficiency Judgment
Think you‟re off the hook after the short sale for the money you lacked to pay off the
mortgage? Think again, my friend. The dreaded deficiency judgment can still rear its ugly
and expensive head – even years down the road.
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Allow me to explain. Say you owe $300,000 on your mortgage, yet the short sale only
nets the lender $200,000. That extra $100,000 that you are short is known as a
“deficiency.” Releasing you from this deficiency does not go hand-in-hand with the lender‟s
authorization to short sell the house.
Whether the lender will pursue you for payment of the deficiency depends, first, on
whether you live in a recourse state or a non-recourse state. Wisconsin is a recourse
state, which means that its laws allow for deficiency judgments.
Minnesota is a non-recourse state, with anti-deficiency statutes. This sounds like good
news until you realize that the statutes don‟t apply to you. Our state‟s statutes prohibit
lenders from pursuing a deficiency judgment only if the home goes through the foreclosure
process. Since a short sale prevents a foreclosure, the statutes offer no protection to short
sale homeowners.
Imagine being represented by a real estate agent lacking in-depth knowledge of the
short sale process. Does he have the skills to negotiate with the lender of both the first and
second loan (if you have one), to waive the deficiency? Has he built the relationships
within the big mortgage companies that help to facilitate such negotiations? Are you willing
to be his test subject when it could mean being on the hook for an enormous pile of
money?
While it‟s easier to have the first mortgage deficiency waived, the second may be
challenging. This is where the agent‟s years of experience, and the level of trust she‟s built
within the various lenders‟ short sale teams, determines whether your second lien is
waived, or you have to come up with the money to pay it off before the lender will allow the
short sale.
Other Common Mistakes Inexperienced Agents Make
On any given day, your lender‟s short sale team may have up to 75 or more short sale
packageson their desks. Over 30 percent of these short sale requests will be denied
because of listing agent errors. Now, many agents unfamiliar with the process are quick to
blame the buyer‟s agent. However, the buck ultimately stops with the listing agent. Some
of the more common errors lenders see include the following scenarios:
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
The listing agent lacks the legal knowledge required to
conduct a short sale. Many homeowners have lost
their homes to foreclosure after lenders learn –
typically late in the process – that the transaction is
not at “arm‟s length,” thus canceling the transaction.
Inclusion of purchase agreements requesting repairs –
at the lender‟s expense – to be completed before the
close of escrow. Lenders won‟t pay for repairs, and,
since the seller is insolvent, neither will he. Short sale
specialists know that a repair contingency in a
purchase agreement will derail the deal so they won‟t
accept one. Instead, these specialists submit a
counteroffer to the buyer, insisting that he remove this
contingency.
The buyer isn‟t sufficiently pre-approved for a
mortgage. The inexperienced listing agent will leave
the vetting of the buyer‟s loan approval up to the
buyer‟s agent – a big mistake. It is up to the listing
agent to foresee anything that may prolong, or even
kill, the transaction.
The offered purchase price is less than what the lender would realize from a
foreclosure sale. The short sale expert understands market value and what the home
will likely bring at auction. Submitting an offer for less than what the lender will make
at auction is a waste of time.
The listing agent asks the lender which forms to use, how to fill out the contract, and
for any number of other pieces of advice that he or she should already know. The
lender‟s short sale negotiator typically isn‟t a real estate attorney or broker, and
doesn‟t have time to school the novice short sale agent. Are you willing to wait while
your real estate agent learns the process? Is your lender?
Arm's Length
Requirement
One of the negotiator’s most
important tasks is to determine
that the lender is receiving the
most amount of money possible for
the sale of the house.
This assurance comes from
several processes: the Broker’s
Price Opinion; proof that the home
was effectively marketed to the
public; seeing the physical proof of
all offers received; and determining
whether the short sale transaction
is one known as “arm’s length,”
meaning none of the parties have
close ties, such as family members,
friends or business associates.
The arm’s length requirement
came about as a result of
homeowners performing back-
room deals at the lender’s expense.
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The short sale package is incomplete. Inexperienced agents frequently make this
mistake. What happens then is that the homeowner‟s file goes to the bottom of the
stack until the lender's short sale team receives the appropriate documents. Again,
anything that delays the process puts you in danger of losing your home to
foreclosure.
Although it may sound unbelievable (with all of the news reports about how lengthy
the short sale process can be), I have had inexperienced buyer‟s agents submit
offers to purchase with 30-day acceptance clauses – meaning the buyer is insisting
that the lender respond to the offer within 30 days. I have also heard of inexperienced
listing agents counseling their clients to accept these offers, and then sending them
off to the lender. There is no way a lender will accept a 30-day acceptance period, so
these agents‟ ignorance present yet another risk to you, the homeowner.
Agents who don't perform a lot of short sales, especially those working on their first,
typically take the homeowner's word that he or she doesn't have PMI (Private
Mortgage Insurance). Since it is entirely possible that the lender took out a policy
without the homeowner's knowledge, the experienced short sale expert knows to
verify the homeowner's claim. PMI companies can stop the short sale process, so it's
vital to know whether the home has a policy. (See Chapter 9 for more information on
PMI).
Although the short sale is a time-sensitive transaction, and the urge to rush the agent
hiring process is common, take the time to ensure that you are hiring the right agent. Here
are a few tips:
Don’t Be Sentimental
Your short sale is too important to your financial future to entrust to Aunt Tillie who,
although she has been in real estate for decades, is not a short sale expert. Although real
estate agents typically expect family members and close friends to throw their real estate
deals in their direction, the short sale is an exception, and where you should put your foot
down.
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Be Relentless
As a real estate agent, I would love to be able to counsel you to choose me to handle
your short sale. While I am the best choice in Minnesota and Wisconsin, that advice would
be self-serving. This book is meant to teach you about the short sale process, not to toot
my own horn, and, like any other part of the real estate transaction, this process requires
due diligence on your part.
My advice to you is to interview at least three agents for the job of listing your short sale.
Like any other job interview, you need to ask lots of questions, and ask for documentation
to back up each agent‟s claims. You must be relentless in your vetting of the agents. (See
Appendix iifor more tips and questions to ask potential listing agents).
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 6: The HAFA Short Sale
It stands for Home Affordable Foreclosure Alternatives, but most folks know it as HAFA.
This program is a component of the U.S. government‟s Making Home Affordable program,
which aims to both streamline and simplify the short sale process, and to help underwater
homeowners move on with their lives by providing financial assistance.
Because HAFA short sales are only offered to homeowners with mortgages owned by
Fannie Mae, Freddie Mac, and to those who hold non-government sponsored lenders
(government-sponsored loans would be FHA or VA loans – these loans have their own
short sale programs, and we'll look at these in forthcoming chapters), it is imperative to
know who owns your loan before proceeding. If you took the time to carefully choose your
listing agent, he or she can assist you with this.
To help you decide whether a HAFA short sale is the choice for you, let‟s look at the
advantages and disadvantages.
Advantages of a HAFA Short Sale
It‟s difficult to imagine that losing your house has any advantages whatsoever, but when
the loss is unavoidable, it‟s best to look for the most painless way. HAFA has some
attractive advantages that are lacking in the traditional short sale:
The homeowner is released from the mortgage debt – including the amount he or
she is “short.”
Homeowners may be eligible to receive $3,000 in relocation assistance.
HUD housing counselors are available, offering free advice.
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The homeowner, the listing agent, and the lender work together to determine the
best price for the home.
HAFA short sales are easier on the consumer‟s credit report than conventional short
sales. This is because they usually close quicker, eliminating the amount of missed
payments.
The lender pays your agent‟s commission, as well as customary closing costs.
Disadvantages of the HAFA Short Sale
While the advantages far outweigh the disadvantages, it is important to weigh the pros
and cons of any real estate transaction to ensure that it is right for you.
HAFA provides $8,500 to pay off a junior lien, such as a second trust deed. Many
second lien holders are unwilling to accept only $8,500. If you hold a substantial
home equity loan balance, for instance, HAFA may not be a viable option for you.
If the lender doesn‟t accept the short sale, or the lender fails to close escrow within
120 days, the homeowner is expected to submit a deed-in-lieu of foreclosure.
Homeowners with cash reserves equal to three month‟s mortgage payments or
$5,000 (whichever is greater) may be disqualified from the program.
To make matters even more confusing, Fannie Mae and Freddie Mac use different
HAFA forms. Freddie Mac requires an accepted short sale agreement before you list the
property. Although the programs are almost identical, there are other subtle differences
between them that only a real estate agent thoroughly familiar with the HAFA process is
aware of.
Eligibility Requirements
If the HAFA sounds like something you‟d like to pursue, take a look at the following
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eligibility requirements to see if you qualify:
Fannie Mae or Freddie Mac owns your mortgage.
You have lived in the home for the past 12 months.
Your primary mortgage balance does not exceed $729,750.
You owe more on the home than what you can realize when you sell it.
You obtained the mortgage before January 1, 2009.
You are able to prove a valid financial hardship that makes it impossible for you to
pay your debt.
You are more than 60 days delinquent on your mortgage.
You‟ve not been convicted of felony larceny, theft, forgery, tax evasion, fraud, or
money laundering in connection with a real estate or mortgage deal over the past
10 years.
The home is not condemned, abandoned or vacant.
Applying for the HAFA Short Sale
Short sales, whether conventional or through a government program, are paperwork
intensive. As you can imagine, the government programs have mountains of forms for the
homeowner to fill out and submit.
If you feel that you qualify for a HAFA and wish to pursue this type of short sale, it is
imperative that you employ a short sale certified real estate agent. These agents typically
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have the Fannie Mae and Freddie Mac forms required to get the process started.
HAFA, like many recent government programs that aim to help homeowners, has a shelf
life. The deadline for performance of a HAFA short sale is December 31, 2013.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 7: FHA Short Sales
As you no doubt realize by now, short sales come in a variety of forms, depending on
who owns your mortgage loan. If you have a loan backed by the Federal Housing
Administration (FHA), the government has a short sale program just for you.
Known as the Pre-foreclosure Sales Program, and overseen by the U.S. Department of
Housing and Urban Development (HUD), this short sale program is quite similar to the
conventional short sale process.
The FHA short sale, however, differs in ways that benefit the homeowner:
All proceeds from the sale, despite the fact that they aren‟t enough to cover what
you owe the lender, satisfy the debt in full.
HUD pays the homeowner $1,000 if the home sells within 90 days of the date of
application.
HUD allows for your real estate agent‟s commission and certain closing costs to be
included.
If the buyer is using an FHA loan, HUD will pay up to 1 percent of his or her closing
costs. Many buyers request 3 percent of closing costs, so the agent must submit a
variance to HUD to meet this request.
FHA Short Sale Rules
Like all short sales, the FHA short sale transaction must be “arm‟s length.” Additionally,
HUD has specific rules on which offers the homeowner can approve. HUD calls this the
“tiered net proceeds requirement,” and it looks like this:
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During the first 30 days that the home is on the market, the seller is prohibited from
accepting any offer that is lower than 88 percent of the home‟s appraised value.
During the next 30 days, the homeowner is instructed to only approve offers that
amount to at least 86 percent of the home‟s appraised value.
From then on, HUD will only entertain offers with a purchase price of at least 84
percent of the appraised value of the home.
HUD also has rules about what concessions the seller can make to the buyer. The
following concessions are prohibited:
Money back for repairs.
Paying for the buyer‟s home warranty.
The seller can‟t allow for the payment of discount points on other than an FHA-
backed loan.
Contracts allowing for the payment of the lender‟s title insurance fee can‟t be
accepted.
Imagine an inexperienced real estate agent, unfamiliar with any of these regulations, at
the helm of an FHA short sale. These regulations are typically what trips up the novice
agent and cause these transactions to fail. This is why it is so important to take the time
necessary to completely vet each agent that you interview. Submission of a contract to
purchase that includes theseconcessions, or a lower-than-acceptable price, may end up
derailing the entire transaction, and pushing you into foreclosure.
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Am I Eligible?
FHA Pre-Foreclosure Sales Program approval requirements are quite similar to those in
a conventional short sale:
The homeowner must occupy the home unless forced to move because of a job,
the homeowner is deceased, or the homeowners are divorced. In any of these
cases, the home must not have been rented out for more than 18 months.
You must prove that you can‟t pay your mortgage payments.
You must be a minimum of 31 days delinquent on your mortgage by the time the
sale closes.
.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 8: VA Short Sales
The United States Department of Veteran‟s Affairs (VA), like the Federal Housing
Administration (FHA), doesn‟t actually provide loans, but guarantees their repayment.
Lenders love these guarantees, and these types of loans
allow lenders to offer low-to-no-down-payment loans with
better interest rates and terms than conventional loans.
If you have a VA-backed mortgage and you can no longer
make your payments, and you can‟t sell the house for what
you owe your lender, you may want to consider the VA‟s
version of the short sale, known as a Compromise Sale.
While similar to a conventional short sale, there are some
distinct differences that you should know about.
First, the lender will receive the full balance of the loan,
not a shorted amount as it does in the conventional short
sale. Next, the VA will pay the veteran $1,500 to assist in
his or her relocation.
VA Compromise Sale Eligibility Requirements
The VA will first review your situation to determine whether you have any assets that
might be sold to satisfy the deficiency. Then the VA will consider your financial situation,
looking for a significant hardship. Those hardships considered severe enough to quality for
a VA compromise sale include:
A decrease in income.
Major medical expenses.
The death of any partner that financially contributes to the household.
Beware of Scams
The Veteran’s Administration
cautions veterans to be aware of
some of the scams that have
popped up during the housing
crisis.
Do not sign any paperwork
offered by any individual or
company, other than the VA or your
lender, that offers to pay off your
mortgage.
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Involuntary relocation out of the area.
VA Compromise Sale Requirements
The VA will appraise the home to determine if the compromise sale will net it more
money than a foreclosure sale. If it will, the following rules are in place:
The VA will not accept less than current market value for the home.
The loan must have been taken out before December 31, 1989.
The lender must agree to write off that portion of the debt that exceeds the
maximum guarantee.
The home must have no other liens.
Steps to a VA Short Sale
While your real estate agent will go over the rules and requirements for the VA
compromise sale, there are certain steps to take to ensure a successful transaction:
Your agent will contact your lender's loss mitigation department to advise it that you
can no longer make your loan payments, and will be selling the home via a
Compromise Sale.
The home is listed and marketed to the public.
You must gather the documents required for inclusion in the Compromise Sale
package. Your listing agent will assist you with this, and send it to the lender with
the purchase agreement.
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Once approved, the buyer‟s lender hires a VA-approved appraiser and checks the
property‟s title for liens and other clouds.
As with the other government-sponsored programs and conventional short sales, the
lender pays your agent‟s fees as well as customary closing costs. You are not expected to
bring any money to the closing table.
Are you ready for some more good news? A veteran is typically eligible to purchase
another home within two years of closing a compromise sale.
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Chapter 9: Private Mortgage Insurance and the Short Sale
One of the many roadblocks that may pop up during your journey down the short sale
highway is your Private Mortgage Insurance (PMI) company.
What is PMI?
PMI is insurance for your lender. (Yes, you pay for it, but it only protects your lender). If
your down payment on the house equaled less than 20 percent of the sales price or the
appraised value, you were required to purchase PMI.
While most homeowners find this extra monthly charge onerous, without PMI, they
would not have been able to purchase the home unless they came up with a 20 percent
down payment. (So, it is a necessary evil).
The good news is that as soon as you reach a 20 percent equity stake in the house, PMI
is eliminated. The bad news is that the average American homeowner lost 30 percent in
home value during the recession. Thus, PMI is a prolific nightmare - for millions of
Americans - when it comes to short sales.
How Does Having PMI Affect the Short Sale?
When a homeowner defaults on a mortgage insured with PMI, the mortgage insurer
pays the lender a percentage of its loss. The size of the loss depends on whether the
home was short sold or foreclosed.
In a short sale, the loss typically includes the loan balance and accrued interest, realtor
commissions, and closing costs. If the home goes to foreclosure, the loss will also include
unpaid property taxes, legal fees, maintenance and hazard insurance, among other items.
What percentage the insurer pays varies as well. For instance, Freddie Mac and Fannie
Mae require that the coverage level of PMI be based on the borrower‟s loan-to-value ratio.
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The first task of the insurer, when notified that there is a short sale request, is similar to
that of the lender: to determine whether it will realize more money from the short sale or
from a foreclosure. Mitigate the losses as much as possible.
The second factor taken into consideration is whether to pay the loss now (with a short
sale), or put off paying the loss until further down the road (with a foreclosure).
Now, tell me, which would you choose – pay now or pay later? The choice is obvious,
which is why many mortgage insurance companies don‟t care if the house goes into
foreclosure. This gives the insurer leverage over the homeowner when it comes to
accepting or denying the short sale request.
An Example
Allow me to introduce you to my clients, Monty and Lily. I determined that the lender‟s
loss, at the time of the short sale approval, was close to $50,000. The lender had not
initiated foreclosure proceedings at that time, so foreclosure couldn‟t possibly occur for
another year.
During that time, Monty and Lily would not be making house payments, and for every
month that they didn‟t, the amount of money the lender was losing would swell.
In Monty and Lily‟s case, that amount was $1,785 a month. By the time the lender went
through the foreclosure process, that $50,000 initial loss had ballooned. In fact, the
interest alone was over $20,000 and there were still all the additional costs of foreclosure
to tack on to that.
Obviously, in this case, the insurance company will best mitigate its loss by agreeing to
let Monty and Lily short sell the house. Had foreclosure proceedings already begun,
however, the company may not have been amenable to the short sale.
As in all things having to do with the short sale, however, there‟s a flip side to my client‟s
seemingly happy ending.
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Remember, the PMI company has leverage over the transaction. The insurer says they‟ll
allow the short sale ifMonty and Lily sign a deficiency agreement.
There is Good News
When faced with the demand to contribute money to mitigate the insurer‟s loss, the
homeowner has several options:
Have the buyers increase their offer.
Contribute cash to help offset the insurer‟s loss.
Sign a promissory note for the contribution to the insurer‟s loss.
In Monty and Lily‟s case, the buyers refused to increase their offer and the couple had
no money to contribute to the insurer‟s loss. To get the deal done, they opted for the
promissory note.
The insurer wanted $25,000. I negotiated a deal that included a reduction to $10,000,
payable at $100 a month, interest-free.
The Moral of the PMI Story
Actually, there are two morals to this story:
If you have PMI, prepare yourself for the possibility that you may have to either
come up with some cash or sign a promissory note to get the short sale to the
closing table.
This once again illustrates how critical it is to hire a real estate agent that is a bona
fide short sale expert. The novice hasn‟t a clue about how PMI can kill the deal. The
rooky short sale agent lacks the negotiating skills required to knock down the
amount of money the insurer demands.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 10: Tax Ramifications of the Short Sale
Call me a teacher (I have an education degree), call me a dad, a husband, a sports
fanatic, or a real estate agent if you like: one thing you can‟t accuse me of is being a tax
professional. That said, I am legally prohibited from giving out tax advice. If you have any
concerns about the tax consequences of a short sale, I urge you to seek the advice of your
accountant or attorney.
I decided to include this chapter in the book because of the very real possibility of a
change in how the IRS treats the debt forgiven in a short sale. This will have a significant
impact on your taxes, and it‟s out there, looming on the horizon. If you are considering a
short sale, you need to act quickly.
The Mortgage Forgiveness Debt Relief Act of 2007
Once upon a time, when a homeowner had his mortgage debt forgiven in a short sale,
the IRS taxed him on the amount forgiven. For instance, if he owed his lender $350,000
but the short sale only resulted in $210,000, the IRS considered the $140,000 that the
lender forgave as “ordinary income” and the homeowner would have been taxed on it.
Now, I don‟t know about you, but the tax ramifications of an additional $140,000 to my
income would be quite painful.
Then, in December 2007, President George W. Bush explained, "When your home is
losing value and your family is under financial stress, the last thing you need is to be hit
with higher taxes. So I'm working with members of both parties to pass a bill that will
protect homeowners from having to pay taxes on cancelled mortgage debt."
President Bush was successful and, in December 2007, he signed The Mortgage
Forgiveness Debt Relief Act. Underwater homeowners now had a three-year window in
which to expect tax relief on distressed property transactions.
In October 2008, congress enacted legislation to extend the tax relief through 2012.
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Some members of Congress have been pushing for another extension (H.R. 4290, the
Homeowner Tax Fairness Act, and S. 2250, the Mortgage Forgiveness Tax Relief Act).
Since the government seems to be looking in every nook and cranny of this country for
additional revenue, I wouldn‟t count on any extensions. In fact, GovTrack.us, a website
that keeps track of pending legislation, gives the House legislation a 3 percent chance of
passing and an 18 percent chance for the Senate bill.
The Insolvency Exception
Prior to the 2007 passage of the Mortgage Forgiveness Debt Relief Act, the IRS
included certain exceptions to their rules on taxing forgiven debt. One of these was the so-
called insolvency exception, wherein the IRS said that the debt won‟t be considered gross
income if the “discharge occurs when the taxpayer is insolvent.”
What do they mean by insolvent? Here‟s the answer: according to IRS Code Section
108, the term “insolvent” means “the excess of liabilities over the fair market value of
assets. With respect to any discharge, whether or not the taxpayer is insolvent, and the
amount by which the taxpayer is insolvent, shall be determined on the basis of the
taxpayer‟s assets and liabilities immediately before the discharge.”
The operative words there are “immediately before the discharge.” This means you must
have been insolvent at the time the short sold home closes escrow - becoming insolvent
afterward won‟t count.
Again, I am not a tax professional, but I do know that determining insolvency is complex
and requires the assistance of an accountant.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Chapter 11: Should I Wait for the Market to Recover?
Many struggling homeowners are sitting on the sidelines watching the real estate market
closely, hoping that it improves quickly enough to allow them to perform an equity sale, and
maybe even make a few dollars in the process.
If you‟re not in dire straits, meaning foreclosure isn‟t imminent, and (although it might be
a struggle) you feel you can remain in your home, your question is: "Should I?"
That depends on who you ask. Housing news over the past year has yielded a mixed
bag of opinions and forecasts. Although we‟re seeing pockets of improvement in home
prices, most experts agree that it will take several years for prices to return to their pre-
housing market crash levels – enough for you to recoup some of the value you have lost.
As I mentioned, there is some disagreement as to when the housing market will fully
recover. Let‟s take a look at the most recent MacroMarkets home price survey. This survey
is based on the combined opinions of over 100 economists, housing market analysts, and
investment strategists, and illustrates their expectations for 2012 and beyond.
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As you can see, the experts predict an additional loss of 0.4 percent in values through
2012, and then a modest increase in 2013 and beyond. By 2016, the average American
homeowner may realize only a 3.5 percent increase in home value. Just this one study
alone shows me that it isn‟t worth it to sit on the home unless you plan on sitting on it until
at least 2020. To further explain, let‟s look at two scenarios.
Homeowner A:
Homeowner A purchases her home in January 2005. She obtains a $300,000 interest-
only, 10-year ARM at 6.25 percent interest. She also takes out a second mortgage at 7
percent interest.
Let's look at how long it will take her to break even on the loan (and no longer be upside
down).
As you can see, the break-even point on this loan, after paying all customary closing
costs, is 2021. This example assumes that housing prices begin to appreciate, and continue
that trend.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
So-called 80/20 loans have been common during the past decade, and the above graph
is illustrative of why so many Americans are upside down in their mortgages. Sadly, the
chart also shows how very long it will take to break even.
On the following page, we'll look at another scenario.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Homeowner B:
This homeowner purchased his home for $250,000 in January, 2007. He obtained a 30-
year fixed FHA-backed loan at 5.5 percent interest.
Here‟s a look at how long it will take Homeowner B to break even on the mortgage:
FHA-backed loans are quite popular, mainly because they allow homeowners to get into
a home for as little as 3.5 percent down. The problem here is that a large portion of the
monthly payment goes toward paying the interest on the loan, so for the first five years or
so, the principle hardly budges.
The chances are good that your home's value, and what you owe on your mortgage, will
catch up with one another somewhere down the line. That "somewhere," however, may be
close to a decade away.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Afterword
I hope that you've enjoyed reading this book as much as I enjoyed writing it, and that all
of your short sale questions are answered.
When you're ready to begin the process, I would be honored to be the agent who guides
you through it. To get started, call me at 763-607-1415.
I'll get to work right away, creating a verifiable broker's price opinion that is sure to be
accepted by your lender. I'll also get busy creating a bullet-proof marketing plan that will
draw buyers to your home like a magnet. Finally, you and I will work as a team to put
together the ideal short sale package.
If, after reading this book, you think that perhaps your income is too high, or you hold too
many assets to be approved for a short sale, let's talk. Only by meeting with me will you
know for sure. Since my services are yours, free of charge, you owe it to your financial
future to at least set up a meeting.
Regardless of your financial situation, if you owe more on your home than what it's
worth, lets work together to get you out from under that burden.
I wish you all the best during this turbulent time in your life, and hope to be able to serve
your real estate needs.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Appendix i: Duties of the Short Sale Listing Agent
Since the agent is the most important component of the short sale process, I thought it
might be a good idea to let you know what you should expect of your listing agent.
Remember, an inexperienced agent is not going to understand the depth and range of
these duties as they pertain to the short sale.
Keep this list handy as you interview agents for the job of listing your short sale. Ask
each one to explain his or her duties during the process and avoid any agent that can‟t
rattle the following information off the top of his or her head. Your agent should be able to:
Contact your lender to obtain authorization to communicate on your behalf.
Explain the entire short sale process to you so that you have a thorough
understanding of what is going to occur at each step. Explain the tax and credit
ramifications of the short sale, and advise that you seek further counsel from your
attorney and/or tax professional.
Counsel you on how to ready the home for the market, and explain to you your
duties during the marketing process.
Compile the preliminary short sale package, ensuring that it includes a release of
liability to protect you from having to pay the deficiency after the sale.
Negotiate with buyers to bring in the amount the lender is most likely seeking.
Add the purchase agreement and the HUD-1 statement to the short sale package
and send it to your lender for approval.
Assist your lender in verifying the home‟s current market value.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Negotiate second lien payoffs with your lender.
Negotiate any demands from the holder of the second lien.
Follow up with the lender‟s short sale team on a weekly basis, and relay the results
of these communications to you.
Order the preliminary title report.
Comply, in a timely fashion, with all lender requests.
Compare the short sale approval letter to the HUD-1 to ensure everything matches.
Deliver the short sale approval letter to all parties involved in the transaction.
Review closing documents.
The above-mentioned duties are the basics and, believe me, anything can and does
happen that may require adjusting these duties and adding additional ones.
Only an experienced short sale listing agent knows what to expect and how to deal with
the unpredictable aspects of the short sale transaction as they arise. Only an agent with
contacts within the lender‟s short sale team can move the transaction along quickly.
Choose your agent carefully.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Appendix ii- Questions to Ask in the Real Estate Agent Interview
How many short sales have you performed in the past year?
How many of those transactions were successful?
Do you hold any short sale credentials?
I have a second loan on the house. How will this be handled if I hire you?
How do I know if I have PMI?
If I do have PMI, will that affect the short sale?
Do you have any direct contacts within my lender's short sale department?
On average, how many days do your short sales take to close?
Do you use Equator? (See Appendix vii).
How many offers will you submit to the lender? (The answer to this should be "One
– the best one.") If the agent says that all offers will be submitted, find another
agent.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Appendix iii: Contents of the Short Sale Package
When complete, the short sale package will contain:
The Authorization Letter, signed by all parties (see Appendix iv).
Your last two bank statements.
If employed, your last two pay stubs.
A hardship letter (see the Appendix v for an example).
The last two year‟s tax returns, and IRS Form W2 or IRS Form1099.
The signed purchase agreement(s).
Short Sale Contingency Addendum (see Appendix viifor an example).
Required bank addenda, such as the Arm‟s Length Affadavit.
A printout of your home‟s listing from the Multiple Listing Service database.
Samples of marketing pieces we've created to help sell the home.
Proof that the home is worth what we say it is – typically in the form of a Broker's
Price Opinion.
Exclusive Kris Lindahl Short Sale Report.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Appendix iv: Letter of Authorization
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Appendix v: Sample Hardship Letter
(Sample Hardship Letter courtesy of the United States Department of Housing and Urban Development)
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Appendix vi: Homeowner Financial Worksheet
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A Homeowner's Guide to Short Sales 48
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Appendix vii: Short Sale Contingency Addendum
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Appendix viii: Short Sale Glossary
1099-C
The 1099-C is an Internal Revenue Service form that is issued to homeowners receiving
debt forgiveness. In the absence of government amnesty programs, (such asThe
Mortgage Forgiveness Debt Relief Act of 2007, set to expire at the end of 2012), the
amount listed on the 1099-C that you receive from your lender after the short sale will be
treated as ordinary income on your tax return.
Closing/Settlement
Closing, sometimes called "settlement," is the last step in the short sale process. All
parties to the sale come together to sign documents and funds are disbursed, according to
the contract terms.
CMA/BPO
A CMA (Comparative Market Analysis) and a BPO (Broker‟s Price Opinion) are similar
methods used by real estate agents to determine and justify the estimated value of a
property by comparing it to similar properties that have recently sold.
Concessions
Concessions are items that sellers concede to buyers. They can include anything from the
home's furnishings to the payment of closing costs.
Contingencies
A contingency in a real estate contract is a clause that makes the sale of the property
dependent upon the outcome of some event. For instance, an inspection contingency
allows for the buyer to walk away from the deal upon dissatisfaction with the home
inspection. Contingencies are time-sensitive, and expire if not formally removed by the
specified time.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Equator
Equator is an online software service that improves the lenders' response time and keeps
track of important documents.
Financial Worksheet
Typically a spreadsheet, the financial worksheet lists all of your income and expenses,
savings and other assets. The lender typically requires supporting documents to back up
your claims on the financial worksheet. Examples of documents that you may be required
to supply include bank statements, investment account statements and paycheck stubs.
(See Appendix vi for a sample financial worksheet).
Hardship Letter
The hardship letter, addressed to your lender, explains your current financial situation,
how it came about and why it will persist into the foreseeable future. You will find a sample
hardship letter in Appendix v.
HUD-1 Settlement Statement
The HUD-1 Settlement Statement is a document that itemizes all funds that will be paid
or have been paid at closing.
Junior Lien
A junior lien -- typically a mortgage – is one that is subordinate to your first mortgage.
The priority of liens on your property is generally established by the date recorded, or by a
subordination agreement, authorized by junior lien holders to establish a refinanced first
mortgage as the senior or primary lien.
Letter of Authorization
A letter that allows me, as your listing agent and authorized representative, to
communicate or negotiate with the lender on your behalf. You‟ll find a sample letter in
Appendix iv.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Limited Third Party Authorization
A limited third party authorization gives your primary lender permission to discuss your
situation and negotiate with the junior lien holder.
Listing Agreement
The lender typically wants a copy of the agreement you sign with me, authorizing me to
list your home for sale. Some lenders also require a copy of the MLS listing for the home
and a log of all showings.
PMI
Short for Private Mortgage Insurance, PMI insures the lender should the buyer default
on the mortgage. See Chapter 9 for a discussion of how PMI may derail your short sale.
Promissory Note
A promissory note is a signed document containing a written promise to pay a specific
sum of money to a specified party.
Purchase Contract or Agreement
This is the contract submitted by the buyer of the property. The lender wants to see a
fully executed contract, along with any counter offers and addendums.
Servicer
A servicer is the financial institution that manages a lender‟s loan portfolio. Duties of the
servicer include receiving payments, sending bills, accounting and communication with
borrowers. Not all lenders use a servicer.
Short Sale Contingency Addendum
Every short sale agreement includes the implied contingency that the sale is predicated
on the lender agreeing to accept the purchase price, which is lower than the amount owed
on the loan. The short sale addendum is a separate form that makes this implication
concrete and requires acknowledgement by the buyer. The short sale agreement also
contains the amount of time the buyer will wait for approval. See Appendix viifor an
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
example of a short sale contingency addendum.
Short Sale Package
The short sale package includes a compilation of all the lender-required documents,
used to determine whether or not you qualify for a short sale and how much money it
stands to realize from the sale. You‟ll find a complete listing of what we need to include in
your short sale package in Appendix iii.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com
Kris Lindahl is a nationally-known authority on the short sale process. He holds real
estate licensure in both Wisconsin and Minnesota, and is the number one short sale agent
at Edina Realty.
Kris is a lifelong resident of Minnesota. Throughout his formative years, his athletic involvement fueled his competitive nature. Kris “hated losing,” which is why he believes he has become so successful in negotiating short sales. “When I negotiate with a bank, I want to win for my client – I‟m not here to lose!” The truth is: Homeowners looking to do a short sale are going to go with an agent who wants to “win” for them. Kris is that guy!
With an education degree from Minnesota State University, Mankato, teaching comes naturally to Kris. Coupled with his passion for helping others, Kris demystifies the short sale process, ensuring smooth transitions for his clients.
Kris currently resides in Minneapolis with his wife and daughter.
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Copyright © 2012 ● Kris Lindahl ● HomeOwnersGuidetoShortSales.com