More Information on Short Sales

At RE/MAX 4000 we feel there is never too much information.  The information  provided by WELLS FARGO HOME MORTGAGE supplies you with good information regarding shortsales. 

FHA recently published Mortgagee Letter 2009-52, which provides guidance on Short Sales and Short Pay Offs.

  • A Short Sale is a previously owned property that sold for less than what was owed.
  • A Short Pay Off is a principal write down of indebtedness that cannot be refinanced into a new mortgage.

 

Short Sales: NOT ELIGIBLE

Borrowers are not eligible for a new FHA mortgage if they pursued a Short Sale agreement on a Principal Residence to:

  • Take advantage of declining market conditions

AND

  • Purchase, at a reduced price, a similar or superior property within a reasonable commuting distance (for example: it would NOT be acceptable for a borrower to sell a home worth $200,000 on a Short Sale to purchase a home with an additional 1,000 square feet for $225,000 on the same street)

Reminder: If previous residence will be rented, the policy published in the WFHM FHA manual continues to apply.

Borrowers in default on their mortgage at the time of the Short Sale (or pre-foreclosure sale) are not eligible for three years from the date of the pre-foreclosure sale.

Note: Borrowers who sold a property under FHA’s pre-foreclosure sale program are not eligible for a new FHA mortgage for three years from the date that FHA paid the claim associated with the pre-foreclosure sale. Exception allowed if the default was because of circumstances beyond the borrower’s control (such as death of a primary wage earner, long term un-insured illness, etc), and the credit report indicates satisfactory credit prior to the extenuating circumstance.

Short Sales: ELIGIBLE PURCHASES

Borrowers are eligible for new FHA financing if:

  • The proceeds of the Short Sale provide payment in full of the loan (the lien is extinguished – no lien/loan needs to be subordinated).

AND

  • Existing mortgage and installment debts are current at the time of sale.

All mortgage payments due on the prior mortgage were made within the month due for the 12-month period preceding the Short Sale

All installment debt payments were made within the month due for the 12-month period preceding the Short Sale
Process/Documentation Requirements

Documentation must be included in the Loan File to show:

  • Borrower was current on their mortgages and all installment debts at the time of the short sale.
  • All mortgage and installment debts were paid within the month due for the 12 months preceding the short sale
  • Proceeds were/are acceptable as payment in full and all liens were/will be extinguished.
  • Borrowers have capacity to pay new loan.
  • Underwriter to comment on the Loan Transmittal regarding borrower eligibility for Short Sale/Pay Off.
  • All other standard documentation conditions apply.

 

Short Pay Offs: ELIGIBLE REFINANCES

FHA will insure a new loan if the existing note holder writes off the amount of indebtedness that cannot be refinanced into the new mortgage if

  • There is insufficient equity in the home based on the current appraised value (decline in property value).

AND/OR

  • The borrower has experienced a reduction in income and does not have the capacity to repay the existing indebtedness against the property.

AND

  • The borrower must be current on their mortgage for the last 12 months.

 

If the existing note holders are reluctant to write-down the indebtedness on their loan, a new subordinate lien may be executed for the amount which the payoff is short. The subordinate financing must meet WFHM subordinate financing requirements.

If payments on subordinate financing are required, they must be included in qualifying ratios (even if deferred 36 months or more). Exception: If no payment on the subordinate lien is due until the property is paid in full (property sold or refinanced). 

Process/Documentation Requirements

Documentation must be included in the loan file to show:

  • Proceeds were/are acceptable as payment in full and all liens were/will be extinguished.
  • Mortgage is current for most recent 12 months.
  • Liens exceed appraised value and/or borrower has experienced reduction in income to the extent that they do not have the capacity to repay the existing indebtedness on the property.
  • Borrowers have capacity to pay new loan.
  • Underwriter to comment on the Loan Transmittal regarding borrower eligibility for short sale/payoff.
  • All other standard documentation conditions apply.

If you have any further questions, please don’t hesitate to contact one of the agents at RE/MAX 4000.  970-241-4000 or gjproperties.com

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