Traps that Can Stop Your Short Sale
You are working along toward a successful short sale, when suddenly you are stopped dead in your tracks. Worse yet, you can have your file closed so you have to start over. What are the traps you need to know about?
Loan servicers will not process a short sale at the same time that they are processing a request for a loan modification. The concept is to work down a waterfall to take one step at a time. The Home Affordable Modification Program (HAMP) wants the borrower to start with a request for a loan modification. If that does not work, then the borrower is turned into a seller with Home Affordable Foreclosure Alternatives (HAFA). If you confuse this structure, it confuses the servicer, which means they destroy your short sale.
You can start a HAFA short sale just by asking to do a HAFA short sale. So, you can be moving through the HAFA review process, when the servicer asks the seller to call them. You have already discussed a loan modification with the borrower/seller and the idea was rejected. However, the servicer brings it up again and persuades the seller to ask to be considered for a loan modification. If your seller shows any interest, your short sale will be terminated and a loan modification file will be opened.
If you think this cannot happen, just listen to what happened to Stewart. He needed to move to another area for work and the mortgage on his house in Raleigh was larger than the value of his home. His short sale with Chase was taking so long that he had many calls from the collections department at Chase. During one phone call, he complained that he was having a hard time keeping up with the mortgage while the short sale was being considered because he was working out of town. The representative of the collections department said he could take his application for a loan modification that could make the payments less while he was being considered for a short sale. Stewart did not mention this conversation to our team. We continued to contract Chase every week and the short sale file suddenly was closed.
We found out why. You cannot do a short sale at the same time you do a modification, it is either one or the other. Stewart was furious because we had to start all over with the short sale. Because of the additional delay, the buyer walked away and I had to find another one. Be sure to counsel your sellers never to say anything that could be interpreted as a request to initiate a loan modification if they are in the middle of a short sale. If a loan modification is better for the buyer, pursue that first because if it is approved, you have done the best thing for your client. However, if a short sale is the best choice, watch out for the trap of a loan modification.
Another trap that involves loan modification is if your file is closed and you send in the short sale again, be sure the lender does not re-open the file as a loan modification. I was doing a short sale on an investment property with Wells Fargo. I should have asked more questions of the seller, because the property was in the name of a limited liability company (LLC) and I assumed that the loan was in that same name. It was not, the seller had transferred the property to the LLC after the purchase. I should have investigated this further and my team could have handled this better. Wells Fargo will not process the short sale under these circumstances, and rightly so, because the transfer by the borrower is a violation of the loan agreement. However, that can be corrected by transferring the property back to the original borrower?s names. Wells Fargo did not contact me to ask to correct the situation, they just closed the file. When made our regular call to keep track of the file, we discovered the problem. The supervisors at Wells Fargo apologized for not contacting me, but the file was still closed.
We re-submitted the entire short sale file. However, it was opened as a request for a loan modification instead of a request for a short sale. I have a hard time understanding how anyone could interpret our file as a request for a loan modification when it had a sales contract and a HUD closing statement. The borrower is clearly trying to sell the property and not keep it with a loan modification. Since it happened once, it can happen again. So, if you resubmit a file, check on it shortly after submission to be sure it is opened as a short sale and not a loan modification. I did not do as well as I could when we first started the short sale, so you can learn from me to check any investment properties held by an LLC. The title needs to be in the name on the loan. Wells Fargo did not do as well as it could when they re-opened the file. However, we are still working together with a new file and hope to get this short sale approved.
Another trap that kills short sales is the 14 day period to return the HAFA Short Sale Agreement (SSA). The loan servicer will send a proposed SSA to the borrower/seller. It needs to be signed and returned within 14 days of the date of the document. To make this process more entertaining, several servicers have a delay in their mailing system so that the SSA is mailed several days after it is dated. Be sure to get the SSA signed and returned within the time limit because the servicer can refuse to consider a HAFA short sale if it is late. The regulations specifically state that a servicer can still consider a HAFA short sale if the SSA is returned after the deadline. However, I am doing a short sale where the servicer refuses to allow us to do a HAFA short sale even though we feel that the SSA was returned before the 14 day deadline.
These are some of the traps that can stop your short sale in its tracks, or even kill it. Use these illustrations to watch out for other traps as you work your way through the short sale maze.