HAMP Update: Guidance to Expedite Permanent Modifications

February 1, 2010

On January 28, 2010, the Treasury Department and Department of Housing and Urban Development (HUD)  released updated guidance for the mortgage servicers who initiate the modifications and monitor the trial periods.  The guidance refines the documentation requirements and other procedures in order to expedite conversions of current trial modifications to permanent ones.

Guidance Details

Supplemental Directive 10-01 provides guidance on two major issues:

  1. Converting Borrowers in the Temporary Review Period to Permanent Modifications

In December 2009, the Treasury implemented a review period through January 31, 2010 to provide servicers additional time to collect and submit missing documentation for borrowers in trial modifications, to require that borrowers be notified of any missing documents, and to give borrowers an opportunity to dispute and correct any erroneous information in their applications. Today’s guidance clarifies for servicers the proper procedures for conversion of those borrowers who are current on their monthly payments to permanent modifications.

Acknowledgement and Review of Initial Package

Within 10 business days following receipt of an Initial Package, the mortgage servicer must acknowledge in writing the borrower’s request for HAMP participation by sending the borrower confirmation that the Initial Package was received, and a description of the mortgage servicer’s evaluation process and timeline. If the Initial Package is received from the borrower via e-mail, the servicer may e-mail the acknowledgment. Servicers must maintain evidence of the date of receipt of the borrower’s Initial Package in its records.

Within 30 calendar days from the date an Initial Package is received, the mortgage servicer must review the documentation provided by the borrower for completeness. If the documentation is incomplete, the mortgage servicer must send the borrower an Incomplete Information Notice in accordance with the guidance set forth in the “Incomplete Information Notice” section below. If the borrower’s documentation is complete, the servicer must either:

  1. Send the borrower a Trial Period Plan Notice; or
  2. Make a determination that the borrower is not eligible for HAMP and communicate this determination to the borrower in accordance with the Borrower Notice guidance provided in Supplemental Directive 09-08.

A single written communication sent within 10 days of receipt of a borrower’s request for HAMP participation may also include, at the mortgage servicer’s discretion, the results of its review of the Initial Package. Mortgage servicers are reminded that Supplemental Directive 09-01 generally prohibits servicers from proceeding with a foreclosure sale for any potentially eligible mortgage loan until the borrower has been evaluated for eligibility under HAMP and has been determined to be ineligible or has declined a trial period plan offer.

 Incomplete Information Notice

If the mortgage servicer receives an incomplete Initial Package or needs additional documentation to verify the borrower’s eligibility and income, the servicer must send the borrower an Incomplete Information Notice that lists the additional required verification documentation. The Incomplete Information Notice must include a specific date by which the documentation must be received, which must be no less than 30 calendar days from the date of the notice. If the documents are not received by the date specified in the notice, the servicer must make one additional attempt to contact the borrower in writing regarding the incomplete documents. This additional notice must include the specific date by which the documentation must be received, which must be no less than 15 calendar days from the date of the second notice. If a borrower is unresponsive to these requests for documentation the servicer may discontinue document collection efforts and determine the borrower to be ineligible for HAMP. If the borrower is determined to be ineligible for HAMP, the servicer must communicate this determination to the borrower in accordance with the Borrower Notice guidance provided in Supplemental Directive 09-08.

Trial Period Plan Approval

Within 30 calendar days following receipt of an Initial Package or complete verification documents, the mortgage servicer must complete its verification and evaluate the borrower’s eligibility for HAMP and, if the borrower is qualified, send the borrower a Trial Period Plan Notice. If the borrower is determined to be ineligible for HAMP, the servicer must communicate this determination to the borrower in accordance with the Borrower Notice guidance provided in Supplemental Directive 09-08. Servicers are reminded that Supplemental Directive 09-01 prohibits servicers from initiating a new foreclosure action while a borrower is in a trial period plan.

Consideration for Alternative Loss Mitigation Options

When a borrower is determined to be ineligible for a HAMP modification, the servicer is required to consider that borrower for all other available loss mitigation options, including but not limited to refinance, forbearance, non-HAMP modifications and, to the extent a borrower does not qualify for a home retention alternative, Home Affordable Foreclosure Alternatives (short sales or deeds in lieu of foreclosure) under Supplemental Directive 09-09. As required in Supplemental Directive 09-08, available loss mitigation options should be described in the Non-Approval Notice.

Conversation from Trial to Permanent Modification:

Servicers must use a two-step process for HAMP modifications. Following underwriting and a determination that the borrower qualifies for a HAMP trial modification, servicers will place qualified borrowers in a trial period plan by preparing and sending a Trial Period Plan Notice to the borrower describing the terms of the trial modification and the payment due dates. Borrowers who make all trial period payments timely and who satisfy all other trial period requirements will be offered a permanent HAMP modification.

Step 1 – Trial Period Plan Start

The trial period is 3 months in duration (or longer if necessary to comply with applicable contractual obligations). Borrowers are not required to sign or return the Trial Period Plan Notice. Servicers should retain a copy of the Trial Period Plan Notice in the borrower file and note the date that it was sent to the borrower. Receipt of the first payment due under the trial period plan on or before the last day of the month in which the first payment is due is evidence of the borrower’s acceptance of the trial period plan and its terms and conditions. The effective date of the trial period will be set forth in the trial period plan and is the 1st day of the month in which the first trial period plan payment is due.

Step 2 – Conversion to Permanent

The borrower must be current under the terms of the trial period plan at the end of the trial period to receive a permanent loan modification. “Current” in this context is defined as the borrower having made each required trial period payment by the last day of the month in which it is due.

Borrowers who fail to make current trial period payments are considered to have failed the trial period and are not eligible for a HAMP modification. Servicers are instructed to use good business judgment in determining whether trial period payments were received timely or if mitigating circumstances caused the payment to be late. Exceptions should be documented in the servicing record.


HAMP Update: Documentation Collection Process

January 30, 2010

On January 28, 2010, the Treasury Department and Department of Housing and Urban Development (HUD)  released updated guidance for the mortgage servicers who initiate the modifications and monitor the trial periods.  The guidance refines the documentation requirements and other procedures in order to expedite conversions of current trial modifications to permanent ones.

Phyllis Caldwell, Chief of Treasury’s Homeownership Preservation Office states that the “guidance represents our commitment to more efficiently move qualified homeowners into permanent modifications.”

“Increasing the number of borrowers receiving permanent modifications under HAMP is critical to our efforts to preserve affordable and sustainable homeownership,” said HUD Senior Advisor for Housing Finance William Apgar. “While we continue to meet our goals to provide immediate assistance, the updates announced today should enable servicers to transition borrowers more quickly and easily from trial to permanent modification.

Guidance Details

Supplemental Directive 10-01 provides guidance on two major issues:

  1. New Requirements that Documentation be Provided Before Trial Modification Begins

A simple, standard package of documents will be required prior to the servicer’s evaluation of the borrower for a trial modification.  This process will be required for all new HAMP modifications that became effective after June 1, 2010, although mortgage servicers may implement it sooner.  The following documents, referred to as the “Initial Package” must include:

Step 1 – Complete the RMA Form

The RMA Form provides the servicer with borrower and co-borrower financial information including the cause of the borrower’s hardship. The financial information and hardship sections of the RMA must be completed and executed by the borrower and, if applicable, the co-borrower. The RMA also solicits data related to the race, ethnicity and gender of the borrower and co-borrower, referred to as Government Monitoring Data (GMD). The borrower and co-borrower are not required to provide GMD. Servicers may not refuse to accept an RMA because the borrower or co-borrower did not complete this section. Click here for instructions for completing the form.

Servicers may require use of the RMA by all borrowers requesting consideration for HAMP or may continue to use other proprietary financial information forms that are substantially similar in content to the RMA. When provided by or on behalf of the borrower, the RMA form must be accepted by servicers in lieu of any servicer specific form(s). When the RMA is not used, servicers must obtain an executed MHA Hardship Affidavit.

Step 2 – Complete the IRS Form 4506-T or 4506T-EZ

The IRS Form 4506-T or 4506T-EZ gives permission to your mortgage servicer to request a copy of your most recent tax return you have filed with the Internal Revenue Service (IRS). After you have completed the form, print two copies – one for your records and one to send to your mortgage servicer. Only one taxpayer is required to sign to Tax Form. Click here for instructions for completing the form.

Step 3 – Gather Evidence of Income

Your mortgage servicer is required to verify your income to ensure that the modified mortgage payments will be affordable for you.  The type of documentation you need to provide depends on the source of your income. The simple Proof of Income Checklist will tell you what documents you need to collect if you are a wage earner, self-employed, or receive retirement income.  Be sure to make copies of your income documentation and keep the originals for your records.

***Note: The income evidence and financial information provided by the borrower may not be more than 90 days old as of the date the Initial Package is received by the mortgage servicer.***

Step 4 – Send the Documentation to your Servicer

After you complete, print, and sign the RMA and Tax Form, send these documents, along with your proof of income, to your mortgage servicer.  You will find the correct mailing address and fax number at Contact Your Mortgage Servicer.

***Note: For all documents required by Treasury (other than the Tax Form), electronic submission and signatures are acceptable.***


Bank of America Short Sale Requirements

June 14, 2009

Bank of America

Bank of America (now merged with Countrywide) is now requesting the following documents for a short sale:

  • A signed letter of hardship
  • Verification of all sources of income (including 30 days paystubs). If self employed, provide profit and loss statement
  • If Bank of America doesn’t pay your homeowners insurance and property taxes, provide proof of insurance, and paid copies of tax receipts
  • A copy of signed purchase offer/sales contract
  • Estimate of net proceeds on HUD-1
  • A written description of any liens on the property

To expedite the review and approval process we suggest that you return the requested information via:

***Overnight Mail or Priority Mail to:***

Bank of America Mortgage
475 Cross Point Parkway
Getzille, NY 14068-9000
Loss Mitigation Department
Fax# 716-635-7255


Making Home Affordable Plan

May 23, 2009

MHA_Logo

The Obama Administration has introduced a plan to try to stabilize the housing market called the Making Home Affordable (MHA) Plan. Through this plan, up to an estimated 7 – 9 million American families may be eligible to refinance or modify their loans to a payment that is affordable now and into the future.

Under this plan, there are two programs:

  • Home Affordable Refinance Program
  • Home Affordable Modification Program

Home Affordable Refinance Program

The Home Affordable Refinance Program gives up to an estimated 4 – 5 million homeowners with loans owned or guaranteed by Fannie Mae or Freddie Mac an opportunity to refinance into more affordable monthly payments. 

Many homeowners pay their mortgages on time but are not able to refinance to take advantage of today’s lower mortgage rates perhaps due to a decrease in the value of their home. A Home Affordable Refinance will help borrowers whose loans are held by Fannie Mae or Freddie Mac refinance into a more affordable mortgage.

Will the Home Affordable Refinance Program help me?

Eligible borrowers who are current on their mortgages but have been unable to take advantage of today’s lower interest rates because their homes have decreased in value may now have the opportunity to refinance. Through the Home Affordable Refinance Program, Fannie Mae and Freddie Mac will allow the refinancing of mortgage loans that they own or that they placed in mortgage backed securities.

How do I know if I am eligible?

You may be eligible if:

  • You are the owner occupant of a 1 – 4 unit home
  • The loan on the property is owned or securitized by Fannie Mae or Freddie Mac (If you don’t know, click here)
  • At the time you apply, you are current on your mortgage payments (current means that you haven’t been more than 30 days late on your mortgage payment in the last 12 months or if you have had the loans for less than 12 months, you have never missed a payment)
  • You believe that the amount you owe on your first mortgage is about the same or slightly less than the current value of your house (You may be eligible if your first mortgage does not exceed 105% of the current market value of your home. For example, if your property is worth $200,000 but you owe $210,000 or less on your first mortgage, you may be eligible. The current value of your property will be determined after you apply to refinance)
  • You have income sufficient to support the new mortgage payments, and
  • The refinance improves the long term affordability or stability of your loan

You may also take the Eligibility Test to determine if you qualify.

How do I apply for a Home Affordable Refinance?

You should call your mortgage servicer or lender and ask about the Home Affordable Refinance application process. The number is on your monthly mortgage bill or coupon book.

Note: Please be patient. Lenders and servicers are implementing the program now and there might be a slight delay before they are ready to process all applications. In the meantime, it will help your lender and speed up the application process if you gather some information and documents before you call.

APPLICATION CHECKLIST:

  • Information about your mortgage such as your monthly mortgage statement and
  • Information about the monthly gross (before tax) income of your household, including recent pay stubs if you receive them or documentation of income you receive from other sources
  • Your most recent income tax return
  • Information about any second mortgage or home equity line of credit on the house
  • Account balances and monthly payments on all your other debts such as student loans, car loans, personal loans, etc.

Home Affordable Modification Program

The Home Affordable Modification Program will reduce monthly payments on existing first lien mortgages for up to an estimated 3 – 4 million at-risk homeowners.

Many homeowners are struggling to make their monthly mortgage payments perhaps because their interest rate has increased or they have less income. A Home Affordable Modification will provide them with mortgage payments they can afford.

Will the Home Affordable Modification Program help me?

If you can no longer afford to make your monthly payments, you may qualify for a loan modification to make your monthly payments more affordable. Millions of borrowers who are current, but having difficulty making their payments and borrowers who have missed 1 or more payments may be eligible.

How do I know if I am eligible?

You may be eligible if:

  •  Your home must be an owner-occupied primary residence (verified with tax return, credit report, and other documentation such as a utility bill)
  • Your home must be a single-family 1 -4 unit property (including condominiums, cooperatives, and manufactured homes affixed to a foundation and treated as real property under state law)
  • Your home must not be vacant or condemned
  • First lien loans must have an unpaid principal balance (prior to capitalization of arrearages) that is equal to or less than:
  • 1 unit properties = $729,750
  • 2 unit properties = $934,200
  • 3 unit properties = $1,129,250
  • 4 unit properties = $1,403,400
  • Your mortgage must have originated on or before January 1, 2009
  • Have a mortgage payment (including taxes, insurance, home owner’s association dues) that is more than 31% of your gross monthly income (If you are uncertain, click here)
  • Have a mortgage payment that is not affordable, perhaps because of a significant change in income or expenses

You may also take the Eligibility Test  to determine if you qualify.

Note: Eligibility requirements are simply government guidelines. Guidelines may change, and lenders make exceptions, if it is in their best interest to do so.  In other words, homeowners should not count themselves out.  If they are having trouble making their house payment, they should explore the loan modification option.  Sometimes, the only way to determine whether you qualify is to apply.

How do I apply for a Home Affordable Modification?

You should call your mortgage servicer or lender and ask about the Home Affordable Modification application process. The number is on your monthly mortgage bill or coupon book.

Note: Please be patient. Lenders and servicers are implementing the program now and there might be a slight delay before they are ready to process all applications. In the meantime, it will help your lender and speed up the application process if you gather some information and documents before you call.

APPLICATION CHECKLIST:

  • Information about your gross monthly  (before taxes) income, including recent pay stubs, if you receive them or documentation of income you receive from other sources
  • Your most recent income tax return
  • Information about your savings and other assets
  • Information about your first mortgage, such as your monthly mortgage statement
  • Information about any second mortgage or home equity line of credit on your house
  • Account balances and minimum monthly payments due on all of your credit cards
  • Account balances and monthly payments on all your other debts such as student loans, car loans, personal loans, etc.
  • A letter describing any circumstances that caused your income to be reduced or expenses to be increased (job loss, divorce, illness, etc.) if applicable

Note: Many lenders have made a committment to delay foreclosure on all loans that meet the minimum eligibility criteria for a home affordable modification

Free Counseling Help

There are two options for free counseling help:

  • Contact me via email freezeforeclosure@gmail and we’ll set up a time to talk.
  • If you don’t feel comfortable talking to me then another free resource is to contact a HUD-approved housing counselor. They provide the same advice I do. The only difference is who you feel more comfortable working with.

What to expect?

Either the housing counselor or I will talk to you about your situation and help you decide what mortgage options are best for you. We will explain what documents you will need to provide to your mortgage company. We can also help you make a budget so that you can meet your monthly mortgage payment and other expenses. There is no charge to work with either one of us.

Before you call 

Gather the following documents:

  • Information about your gross monthly  (before taxes) income, including recent pay stubs, if you receive them or documentation of income you receive from other sources
  • Your most recent income tax return
  • Information about your savings and other assets
  • Information about your first mortgage, such as your monthly mortgage statement
  • Information about any second mortgage or home equity line of credit on your house
  • Account balances and minimum monthly payments due on all of your credit cards
  • Account balances and monthly payments on all your other debts such as student loans, car loans, personal loans, etc.
  • A letter describing any circumstances that caused your income to be reduced or expenses to be increased (job loss, divorce, illness, etc.) if applicable

Immediate Assistance

If you are delinquent on your loan payments and need immediate assistance, call myself at 571-249-4357 or 888-995-HOPE (4673)


BOA Loosening Short Seller Policy

May 2, 2009

Bank of America (BOA) says it will relax its policy on payoffs connected with short sales.  Large banks have been demanding money for home equity lines and second mortgages that would otherwise be worthless if the short sale property went to foreclosure.

Old Policy:

BOA has been among the least cooperative of all banks in agreeing to short sale payoff terms, demanding 10% of what the homeowners owed on the equity line balance or second mortgage before signing off on the short sale, which is necessary for the deal to go through.  BOA spokesman Terry Francisco says the new policy is “less arbitrary, more rational.”

New Policy:

BOA’s new policy is to ask for 5% of the sale proceeds on the short sale, net of realty commissions, closing, and other costs. Some short sellers point to problems, though:  The bank’s previous 10 percent policy meant they’d demand $20,000 on a $200, 000 equity line balance, but under their new policy it will cost the short seller $15,000 if the net proceeds are $300,000″ on a short sale, even though the economic value of their holding may in fact be zero. Says the Realty Times:  “Bottom line for investors: If there’s a Bank of America second mortgage or credit line on the house you’re after in a short sale, work the new numbers.  At least some of the time you might be surprised that the answer from the big bank is now ‘yes.'”


Fannie Mae Instructs Its Services Not to Cut Commissions on Short Sales

March 8, 2009

On February 24, 2009, Fannie Mae sent Announcement 09-03 to its servicers instructing them not to negotiate commissions on short sales below the amount negotiated by the listing agent (unless the commission exceeds 6%). The requirement took effect March 1, 2009. Fannie Mae recognizes that:

  • negotiating commissions for short sales is unfair because getting a short sale to closing requires intensive work over many months, often requiring working with numerous buyers, and
  • compensating real estate agents fairly benefits Fannie Mae because agents play a crucial role in short sales.

The Announcement reminds services that third party approvals (i.e., private mortgage insurers) may be required and can affect commissions. The National Association of Realtors (NAR) has asked both Fannie Mae and Freddie Mac to strengthen their policies against reducing short sales commissions, welcomes Fannie’s announcement, and has urged Freddie Mac to follow Fannie Mae’s lead.


How to Determine A Short Sale Offer

February 3, 2009

home-under-magnifying-glass

The word “short sale” has certainly been a buzz word in the distressed real estate market we are experiencing now. However, many Realtors and investors are still unclear on how to determine a real estate short sale offer that is acceptable to the lender.

The following steps are to be used as a basic guideline on determining what to offer the lender for a short sale acceptance.

Step 1: Determine Fair Market Value (FMV)

The FMV can be determined by evaluating pending and sold comparable properties in a similar or close proximity to the subject short sale property.

A realtor will have access to the MLS (Multiple Listing Service) and can create a CMA (Comparative Market Analysis) for the subject property. This analysis will identify pending and sold comparable properties with same square footage, bedrooms, baths, garage and other similar characteristics as subject property.

Request the Realtors use a sold time frame within 3-6 months when pulling properties in the immediate or surrounding areas. Usually the short sale lender will not consider any sold comparables that are older than 12 months and that are further away than 2 miles from the location of the subject property.

Step 2: Evaluating Sold Comps Systematically

Contrary to popular and often misguided belief, you can use a formulaic system to work in your favor when determining what to offer on the short sale property. This system has been around for years, but for some reason you may have not heard of it mentioned dealing with real estate. Here is the system. You will use the law of averaging. The way this works is like this.

Let’s say you have 8 sold comparables that are all similar in size, square feet, bedrooms etc. Here is how you apply the formula. You would take out the two highest comps and the two lowest ones and average the rest.

EXAMPLE:

You have a property you think is worth $145,000.

You have a Realtor pull a CMA and you find 8 sold comparable properties that match the criteria above.

The MLS shows the following:

  • $159,000
  • $154,000
  • $153,000
  • $161,000
  • $148,000
  • $143,000
  • $146,000
  • $151,500

Using the formulaic approach you would take out the two highest sold comparables ($159,000 and $161,000). Then take out the two lowest sold comparables ($143,000 and $146,000). This would leave 4 other sold comparables.

  • $154,000
  • $153,000
  • $148,000
  • $151,500

You would then take an average by simply adding up the sum of all the sold comparables and dividing them by the total number of properties left. In this case, that number would be 4.

Total: $606,500 / 4 = $151,625

You can reasonably justify the house may sell for $151,625 instead of the $145,00 you originally estimated.

Step 3: Revealing the After Repair Value (ARV)

This terminology is slang often used with real estate investors. It is similar to the FMV with a few differences made up by the amount of repairs the investor estimates the property needs in order to sell quickly on the open market using FSBO (for sale by owner) techniques and not using the MLS.

It can be argued the ARV is more of a guess or suggested value derived by using sold comparables from houses that were NOT sold by a Realtor.

One way to explain the difference is a realtor will typically use a FMV and a real estate investor may elect to use an ARV. An appraiser can use both value methods, but generally sticks to the ones that come from off the MLS. In my opinion…the ARV is a less accurate and dependable value than what come off the MLS.

Step 4: Figuring Out the Broker’s Price Opinion (BPO)

The BPO  is perhaps the single greatest value factor the lender will use to determine the acceptance of your short sale offer. The BPO is KING!

The BPO is a generalized opinion or value of a property the lender uses to determine what the short sale property is worth on paper. They are ordered by the lender and sent to a Third Party Company, such as BPO Direct, First America, LandSafe, etc. These companies have a list of realtors for each state. The BPO’s are ordered and conducted by a BPO Agent (who is usually a Realtor).

The BPO can be an Interior or Exterior type.

If an Exterior type BPO is conducted, it means the BPO Agent did not go inside the property to evaluate its condition. This could be due to the homeowner vacating the house or not being cooperative with the BPO Agent when requesting a time to come appraise the house.

Dealing with “Pretty House” type short sales (categories later defined), you will find the BPO will typically come in 10-20% lower than FMV or ARV. Based on this, you might consider offering 60% of the ARV or FMV value for your initial purchase offer. Of course, this depends on the amount of repairs needed for the property.

If you have what can be classified as a “Pretty House” short sale, which would show very little needed repairs, don’t expect to get a huge discount from the lender for it. If you cannot JUSTIFY a reason for the lender to accept either a small or large discount … don’t expect them to give one to you.

This also dispels the myth that all houses heading towards foreclosure are good short sale candidates. They are not always.

Here are some classifications and examples to make it easier to determine how much of a loss the lender may agree to accept.

Short Sale Classifications:

  1. PRETTY HOUSE
  2. UGLY HOUSE
  3. SCARY HOUSE

EXAMPLES:

Pretty House: Generally in safe, desirable areas and houses selling fairly quickly

ARV/FMV: $100,000
REPAIRS: $5-10,000 (5-10%)
BPO: $80-90,000 (+/- 5%)

Ugly House: Generally a light rehab or fixer-upper, handyman special house in fair neighborhoods

ARV/FMV: $100,000 (With Ugly Houses this number tends to be the “as is” value instead of ARV)
REPAIRS: $11-20,000 (11-20%)
BPO: $80,000 (+/- 5%)

Scary House: Generally in areas that are not desirable, massive repairs needed, lots of crime isn’t uncommon

ARV/FMV: $100,000 (With Scary Houses, this value tends to be the “as is” value instead of ARV)
REPAIRS: $35,000 (21 – 35% +)
BPO: $65,000 (+/- 5-10%)

You can have a Scary House located in a great, fast selling neighborhood and combination of the others, but generally speaking, Scary and Ugly Houses will not be located in excellent neighborhoods. Remember this is a guideline, not an exact science. The BPO Agent will generally consider the “as is” value for both Ugly and Scary Houses.

Now let’s discuss the different loan types the lenders will consider a factor per short sale submission.

Step 5: Learning the Loan Types

When you learn these, you can increase your closing rate for lender accepting your short sale by as much as 50%! Here’s why: if you know more about any property, it provides you better leveraging and ultimately negotiation strategies to target. Not all short sales are created equal.

Conventional Loans

These loans are found all over the place. They provide the most flexibility especially dealing with short sales. Using the $100,000 example, you might start out your offer submitting 60% x 100,000 (FMV) = $60,000… The $60,000 is actually 70% of the BPO Price. However it is very common to see the lender accepting around 80-85% of the BPO price, which would be around $68,000 – $72,250.

This model can fluctuate a little bit, but this is a common average. The BPO (value opinion also considered the PERCEIVED value of the property) to the lender is the MAIN FACTOR. Therefore, in this example, if you thought the BPO was going to come in around $65,000 … You would take 82% of THAT number, which would be $53,300. The lender may very well accept $53,300 based on their perception of the value of the property (their asset).

FHA Loans

I repeat: this is not a scientific grading scale. It is the model used by many short sale investors as a guideline. You can and will have other factors that make you stray from this. If you are dealing with an FHA type loan or any government backed loan, they are going to recoup a set amount if the foreclosure is completed.

For example with FHA loans, the insurer will basically guarantee the lender 82% of an FHA Certified Appraisal amount. Notice, I did not say BPO. For these loans, you will need an FHA Certified Appraisal for the lender to consider in their evaluation process on the property. The BPO will not suffice on these types of loans. You can massage the numbers 1-2%, but 82% is listed in their guidelines.

  • All FHA loans are insured by the federal government
  • As long as the lender follows FHA guidelines, they are guaranteed 82% of the “as is” appraised value
  • FHA loans do not use a BPO. Instead they will require an FHA Certified Appraisal. Use the same techinques on the FHA Certified Appraisal that you would for a typical short sale deal
  • If the debtor is in bankruptcy, no short sale will be approved
  • If the property was used as a rental for more than 12 months, no short sale will be approved
  • If the homeowner does not occupy the property, no short sale will be approved (There can be exceptions to this)
  • The cooperating lender is eligible to receive $1,000 from FHA for performing a short sale
  • Seller MUST fill out FHA specific forms for approval. This will include an Application to Participate and a Homeowners Counseling Certificate, all of which the lender will supply in their FHA Short Sale Packet
  • FHA loans must be at least 30 days past due for short sale consideration
  • The lender is required to give a copy of the appraisal to the homeowner
  • The homeowner can receive up to $1,000 directly from the HUD 1
  • FHA will not go after the homeowner for a deficiency once the short sale is accepted and closed

Veteran’s Affairs (VA) Loans

These type of loans have a guarantee of 88% of the appraised value of the property.

  • Designed for veterans
  • These loans are federally insured
  • VA guarantees the lender at least 88% of the “as is” appraised value
  • A VA appraisal is usually automatically ordered once the debtor becomes 60 days past due
  • The appraisal value can be appealed by the homeowner
  • The VA will work the homeowner and do everything possible for the homeowner to retain VA benefits

Note: Absolutely NO BPOs allowed. All VA loans require certified appraisers to determine value.

Freddie Mac (FDMC) Loans

  • FDMC will not allow the buyer of a short sale property to be anyone but an individual. This means the buyer on the Option Contract (Purchase and Sales Agreement) and HUD 1 CAN NOT be a company, LLC, trustee, or anything of the sort. The purchaser must be an individual name
  • FDMC will almost always require that the property be listed with a realtor, which means they are going to ask for a Listing Agreement. If the offer nets the lender less than 92%, FDMC will require that the property is listed for at least 90 days before approval will be issued
  • The lender has the authority to approve short sales at a threshold of 92% or higher. Anything lower than 92% must be approved by FDMC
  • FDMC has a high customer service standard, which means that if the lender is not responsive to your offers, they are going to want to know about it. This creates another point of leverage to get your offer accepted

Fannie Mae (FNMA) Loans

  • FNMA has a high customer service standard. If the lender is not responsive to your offers, they may actually step in and take over the short sale negotiation process
  • The lender has the authority to approve short sales at a threshold of 90-92% or higher. Anything lower than 90% must be approved by FNMA
  • FNMA rarely requires that the property be listed with a real estate agent
  • FNMA will allow the lender the authority to approve short sales at a threshold of 90% or higher, but will also allow a heavier discount if needed

For Fannie Mae, Coventional, VA, & FHA short sales:

The buyer can be any entity, company, person or trust (the bank may require written proof of the company or of the trust). Most of the loans that you come across regarding short sales are going to be conventional loans.

Step 6: Memorizing the Minimum Accepted NET Offers (of the BPO or FHA Appraisal)

  • VA = 88%
  • FHA = 82%
  • Freddie Mac (FDMC) = 92%
  • Fannie Mae (FNMA) = 90 – 92%
  • Convential Loans = 80% (no set limit)

IMPORTANT: Understand that these are NET percentages to the bank. If you have your offers padded with things like realtor commissions, closing costs and additional fees, these are NOT to be included in this percentage.

EXAMPLE: The BPO on one of your deals comes in $100,000. Offers that may be accepted based on the above criteria would be:

  • VA = 88% = $88,000
  • FHA = 82% = $82,000
  • Freddie Mac (FDMC) = 92% = $92,000
  • Fannie Mae (FNMA) =  90 – 92% = $90,000 – $92,000

Something else to consider is this: all LOCAL banks, usually the smaller ones, will almost always NOT ALLOW more than a 10%-15% discount off the property depending on the amount of repairs needed to fix. Local banks tend to be more conservative in their approach to discount the property. This is partly due to the network of local affiliates the bank can call to get more than one opinion of repairs needed or value of the subject property.

Step 7: Dealing with Second Mortgages & Junior Liens

If you are dealing with a 2nd mortgage holder, you are basically going to negotiate with them the same way.

You will find that many 2nd mortgage holders will not require as much information to make a decision quickly on discounting their loan amount. They will generally order a BPO or have an appraisal on file. It could be older or current. Make sure and ask about it depending on the numbers you find out dealing with them.

Sometimes a lender will actually tell you a BPO price.

Now before you get all excited and think that is GREAT…think again! Typically, they will LIE to you about the price and actually inflate it. Yeah…I know… you never thought lenders lied, did you? Well…they do…and they do it a lot.

When you are dealing with the 1st mortgage holder, it is not uncommon to find out they will only allow $500 – $1000 towards paying off any 2nd Mortgages, Liens, Judgments etc. All lenders are a little different, but the norm is $1,000.

This is another reason why you will deal with more 2nd position lenders that are willing to take pennies on the dollar to satisfy their loans with the homeowner. In fact, you will often negotiate for 80-90% discounts or get approval for 10-20 cents on the dollar! It can be beneficial if you get the 1st mortage holder to accept a short sale and then present that information to the 2nd mortgage holder IN WRITING! If the 1st mortgage holder is willing to take a hit, where does that leave the 2nd mortgage holder? This can be a powerful negotiation technique.

Remember, any junior lien-holder who is holding an over-leveraged or nearly over-leverage asset (the house) is in a HORRIBLE position. They realize this and if you can build a strong case why it would be in their better interest to discount their holding position rather than risk losing EVERYTHING at the foreclosure auction sale. It will not only generally help them, but it can make you, the investor, a HUGE PILE OF MONEY. Why? You just created equity out of thin air. That is the power of short sale negotiations.

In Closing….

If you take the steps for preparing a short sale offer exactly as shown above and apply them to your real estate short sale business; the sky is the limit for your continued success getting them approved.

*This article was adapted from REI Tips


%d bloggers like this: