Under what conditions can a short sale occur without submitting a hardship letter and other financial information?

Asked by Shorty Cellars, Arizona Mon Oct 26, 2009

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Tonje Kearney, Agent, Scottsdale, AZ
Mon Oct 26, 2009
I would like to say a few more things. It is not impossible to get a short sale approved without hardship and financials, but definitely a lot harder. It is not a must with all lenders though. Generally what we do in those circumstances are that we cooperate with an attorney and convince the bank that if they do not accept the short sale and choose to foreclose, they have no recourse against the seller thus a short sale even in the even of no direct hardship is the best outcome for the bank. But yes, in those circumstance you do need to be late on your payments as it is a necessity to prove to the bank that the sellers will let it go and will foreclose in the event the short sale does not get approved.

I would also like to correct Jim, it is NOT a must to be late on payments and agents that tell their clients to stop making their payments without consulting with the lender first are making a huge mistake. There may be legal concequenses for agents doing that. Most lenders will require you to be late, but not all. There are so many factors included in a short sale, it is impossible to generalize.
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Mike Linkena…, Agent, Jacksonville, FL
Wed Jan 13, 2010
NONE. Seller must be in financial hardship:

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Tonje Kearney, Agent, Scottsdale, AZ
Mon Oct 26, 2009

Sounds like you have done your research. I like that! Too many people do not and gets surprised in the end. I am not sure why you are contacting out of state attorneys when your properties is in AZ? But I would recommend doing so. Try Sean St.Clair at 480-218-4445. He charges about $200 for a 45 minute consultation, and if you want to go all out he will review the approval letter(s) to make sure they state what we want them to state, as well as submitting a letter to your lender with the short sale package from him stating the lenders options. This package is $350. It really helps having this coming from an attorney, as the lenders seem to believe an attorneys breakdown of the law moreso than if it comes from the Realtor®.

If you feel you only need a quick consult, you can also try Adam Buck at 480-603-4988, I believe his fee for a phone consult is $95.

Also to clarify, once the approval letter has been received it will state wether or not they will release in full, sometimes they will try to get away with not including such verbiage, thus it is important to thoroughly review it to make sure such language is included. If you have purchase money mortgages I see no reason for why they would not. I have not had one lender dispute such language on purchase money mortgages to date.
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Shorty Cella…, Home Seller, Arizona
Mon Oct 26, 2009
Thanks everyone, I appreciate the rapid response.

The reason I asked the question is that I have been told by two short sale attorneys -- in different states -- that I did not need to prepare a hardship letter, or to present financials. Wow! This is contrary to nearly everything I have read or heard about the short sale process.

One on-line legal firm said that no letter or financials are required because nearly all lenders recognize that fatal errors were made in the loan application process during the frenzy of the real estate bubble, and that those errors could form the basis of a class action law suit if the lender failed to agree to a short sale. Lenders therefore get scared off by that threat and agree to the short sale. Thus their approach to lenders: you sign or we sue.

The second attorney did not provide a reason for not writing a hardship letter or for not providing financials, but he did mention that AZ is a non-recourse state, meaning that in the event of a foreclosure the lender cannot go after the seller's income or assets directly for the unpaid balance, the lender can only collect the property sale proceeds; only the property (not personal income or wealth) is considered collateral.

So what Tonje says makes sense. at least in my case. Since AZ is a non-recourse state, and I have non-recourse purchase money mortgages, the lender would have little or no chance of recovering the deficiency if there were a foreclosure, so the mortgagor might as well proceed with the short sale.

In that case I assume my lawyer would need to obtain a written waiver from the lender stating that the lender would NOT try to collect the deficiency, as a necessary condition of the short sale, otherwise we would simply let it proceed to foreclosure.

By the way, the second attorney did state that he was familiar with my specific lender and that that lender absolutely would not consider a short sale unless the payments were 90 days delinquent. So, in my case, being a nice guy and continuing to make mortgage payments while the short sale is in the works simply is moot. (This seems to be a lose-lose; it hurts both my credit and the lender's bottom line, but what do I know?)

Like Jim Mitchell below, and from the little I have learned, I have come to the conclusion that every case is different -- so let the seller beware.

For example, in some states (like AZ) the non-recourse provision currently applies to short-sold rental properties as well as to primary residences. However, this can easily change at the whim of the AZ legislators who are being heavily pressured by the banking industry to change the law - again.

Also, if there is a second mortgage involved, the type of second makes a difference; if the second was used to purchase the property (e.g., as part of the down payment) it is considered a purchase money mortgage aqd is non-recourse, but if it was a home equity loan, it can be recourse even in a non-recourse state.

Also, as I just learned, the deficiency from s short sale is not federally taxable as a gift if the property is a primary residence, but is taxable if it is a rental property.

I'm sure there are a zillion other Ifs, Ands, & Buts.

In light of all these variables, it certainly seems wise to use an experienced short sale local lawyer in conjunction with an experienced short sale local agent, and a tax person familiar with short sales as well, to make sure that ALL the legal and tax consequences are considered before proceeding. A short sale is NOT something to go into carelessly, especially in light of the potential effect on one's credit - and one's pocketbook.

Shorty Cellars

PS: I am neither a lawyer nor an agent, I'm just regurgitating the little I have so far learned about the process before I jump into the cold short sale water. For my sake and that of others who may come across this, I ask the professionals to please correct any misstatements!
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Tonje Kearney, Agent, Scottsdale, AZ
Mon Oct 26, 2009
I have closed short sales where the borrowers were not late on payments. However as we agree upon, generally speaking they will have to be late. In certain circumstance though and with some lender it is possible.
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Jim Mitchell, Agent, Tempe, AZ
Mon Oct 26, 2009
I agree that it's not always a 'must' to be late on payments, but I've closed a LOT of short sales in the past few years and I've never had ONE lender accept a short sale unless the borrower was delinquent. That was THEIR rule, not mine. They told my clients directly that it was their policy after I requested the borrower contact their lender for clarification.

I was just involved in one similar transaction where I was representing the buyer on a short sale, and the listing agent told me that her clients (the sellers) were NOT behind in the mortgage, and that the lender had told them in the very beginning..."Oh, it's ok, please keep making your payments and we'll still agree to the short sale." I was VERY sketchy about this, but we went ahead and placed an offer. Well, three months later, I get a call from the listing agent. She tells me..."We're VERY close to approval, offer is good, net to the lender is good, etc. etc., BUT...the bank told me today that we need to wait another 60 days before they'll issue the approval letter." Confused, I asked why? "Oh, they told me that my client MUST be AT LEAST 60 days delinquent in their mortgage before they can approve ANY short sale; it's the investor's policy." Of course, they had no record of that previous conversation with the sellers some 3-4 months ago.
Can you guess what I said? "Told you so."

Think about it...if the banks started doing loan mods and short sales without the borrower being in SOME sort of delinquent status, then that would really set a precedent and EVERY single homeowner that either didn't like their rate or the terms of their loan or whatever would start lining up and demanding that they be treated exactly the same way. The banks are dumb but not THAT dumb.

A wise agent would never, EVER, tell their client to stop making payments. That is the borrower's decision to make AFTER speaking with their lender and getting the lender's policy re: short sales. It would be a TREMENDOUS mistake (and possible liability) if a real estate agent told their client..."Don't make your next few payments and the lender will accept your short sale", just to get the listing. If the lender tells you in the beginning that they'll accept a short sale without you being late one single payment, ask for that in writing or at least in an email so you can reference it later. I would also ask for a copy of their specific short sale policies and their timeline. (Wells Fargo Home Mortgage has a great PDF file on their website that spells out a lot of their policies and procedures regarding short sales and there's also a timeline that everyone can follow.)

As agents, when we're hired by homeowners to list their home as a short sale, we end up doing whatever we can to help facillitate that process, but at the same time, an experienced and ethical agent informs their client of ALL options available to them: died-in-lieu, forbearance, loan modification, foreclosure, etc.

So the moral to the story is this: ALWAYS do your homework, get a 2nd or even 3rd opinion, and don't hire just anyone to mediate your short sale. Interview several agents and get their honest opinions as to YOUR specific situation (every one is different) and possibly consult a real estate attorney if you're unsure which way to turn.
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Keith Sorem, Agent, Glendale, CA
Mon Oct 26, 2009
You should interview a couple of Realtors with short sale experience and then compare their proposals. Know your options, then choose carefully. Not all Realtors are the same, to by comparing you will learn a lot.
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Jim Mitchell, Agent, Tempe, AZ
Mon Oct 26, 2009
I doubt you could have your lender review a potential short sale of your home without submitting your financial information. Think of it this way, they are going to make a decision to 'relieve' thousands upon thousands of dollars of debt in your mortgage based upon YOUR financial standing RIGHT NOW. If you have the ability to make your payments, ie: you have tens of thousands of dollars in the bank or you make a nice 6-figure income with moderate debt, they are going to ask you..."Why aren't you paying your mortgage?" And if your answer is anything other than..."Look at my hardship letter and financials; I can't afford it." then you'll likely be denied.
A lot of homeowners believe that simply because the market has fallen tremendously the past 18 months and they now owe double what their home is worth that they are a good candidate for a short sale and the bank will simply bow down and accept it. That's typically not the case, although every lender is different.
At the very least, you could call your lender and ask them..."What do you need to review a short sale on my home?" Also, make sure and ask them..."Do I need to miss several payments before you'll review my file?"
That is critical as most lenders won't even touch a short sale unless your 90-days delinquent and in 'pre-foreclosure'.
Hope this helps!

Jim Mitchell
Century 21 All Star, REALTORS
Web Reference:  http://exploreazhomes.com
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Tonje Kearney, Agent, Scottsdale, AZ
Mon Oct 26, 2009
Your lender are generally going to require a hardship letter and financials, unless in circumstances where we can prove to your lender that they have no recourse in the event of a foreclosure. Some lenders will still require them even if they have no recourse. Each case would have to be evaluated separately. If you have a non recourse purchase money mortgage it is possible, if you do not they will most definitely require documentation from you.
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., , Columbus, OH
Mon Oct 26, 2009
None, in my experience. Lenders are required to submit a very thorough, full package to their investor for approval of the short sale and those items are big pieces to it.


Disclaimer - I am a licensed real estate broker in the State of Ohio
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