When I negotiated my first short sale transaction back in November of 2004 there were very few systems in place and some lenders didn’t even seem to know what a short sale was. I can remember automatically faxing the same short sale package once a day for several days to certain lenders because it might take 2 weeks for the package to show in their system. If that one fax didn’t go through or was lost or shredded by the lender it would be another 2 week delay for them to receive the next. Over time most lenders have become more sophisticated in their methods of receiving and processing short sale packages. However, receiving short sale packages via fax is one thing that has not changed for many lenders. Bank of America began several years ago using the Equator online system to upload documents and process most non FHA short sales. Wells Fargo, Chase, and a few other lenders have recently jumped on board with the Equator process, but it is best to contact the lender and find out if they require faxing the package or receive it by some other method.
When you make the call it is a good idea to ask if they have proprietary documents you are required to complete or if they will accept the short sale specialist realtors generic forms for items like Borrower Financial Information forms, Third Party Authorizations, etc. There may also be specific required documents depending on the type loan and short sale program the borrower qualifies for such as FHA or HAFA (Home Affordable Foreclosure Alternatives).
The following is a list of documents that are generally required by most banks when submitting a short sale package:
Third Party Letter of Authorization
It is best to submit this document as soon as possible by itself first and include it again with the short sale package. Again, call the lender if you are not familiar with their practices because some lenders have a separate fax line for this and others use the same fax number as used for submitting the other short sale documents. Sometimes this document has to go through an approval process before it is available in the system allowing the short sale specialist realtor to speak to the lender about their client’s account, and negotiate the short sale. Include any support staff and escrow officers who may need to speak with the lender during the process. For example I have my assistant and title closer on the authorization form so they can speak to the lender for various aspect of the process they are involved with.
This all important piece of the short sale package allows the borrower to tell the story to their lender of how they got into the situation they are presently in, what they have done to try to remedy the situation, and why a short sale is the best solution to avoid foreclosure. It must be signed and dated by the borrower, with the loan number at the top of the letter.
Borrower’s Financial Information Sheet
Some lenders require their proprietary form to be used and others will accept a generic version. This document will show the borrower’s income and expenses. In most cases when a seller is applying for a short sale this form is going to show that the expenses exceed the income and thus the mortgage payment is no longer affordable. The document needs to be signed and dated by all borrowers on the loan subject to short sale.
In Colorado, this will be the Real Estate Commission approved Listing Agreement including the name of the Brokerage firm, individual broker, names of sellers, full property address, list price, terms of listing including commission, signed by all sellers on title and the listing broker. All pages should be initialed as well. It is typically a good idea to have some clause written into additional provisions stating that the contract is contingent upon the lien holder’s approval. Some lenders (and HUD for an FHA loans) have specific language they need included. We also add the verbiage “Sold as is”.
Fully Executed Purchase Contract
Check with the lender to see if they will accept electronic signatures. This will save a delay in having to go back to the parties for wet signatures and initials. Short sales on FHA loans must be wet signatures. It must be signed by all parties including both real estate agents, and initialed wherever required.
Proof of Funds
A pre-approval letter from the buyer’s lender, or Proof of Funds in the case of a cash buyer, must be submitted along with the purchase contract. This shows the short sale lender that the buyer can perform once short sale approval is obtained.
Last 2 Bank Statements
The last 2 bank statements for all bank accounts must be submitted along with the short sale package. Checking, savings, business (if self employed). All pages front and back, even if they are blank. This is not a printout of the online account. They must be the actual monthly statements. The pages of most statements are numbered so don’t leave any pages out or they will assume you are hiding something and you will be required to submit missing pages. This is another common delay in the process. If there are large deposits or withdrawals provide a written explanation of what they are.
Last 2 Tax Returns
Submit all pages of the federal tax returns, signed and dated for the last 2 years. If taxes were filed electronically the form needs to be signed by all parties on the tax form and dated in the required spot before submitting to the lender. If the tax returns have not been filed a signed and dated letter of explanation along with extensions needs to be submitted along with the 2 most recent tax returns actually filed.
Last 2 W2’s
Last 2 years W2s need to be submitted for every W2 wage earner on the loan to verify wages reported to the IRS by the employer. If self employed provide 1099s and a Profit and Loss statement.
Last 2 Pay Stubs
Initially submit 2 pay stubs no matter how frequently you are paid. Another good question to ask the lender is if they want the last 2 or for a time period. Some lenders will say the last 30 days for example. If there is an unusually high amount of income on a pay stub because of a bonus or over time that is not typical, it is a good idea to provide a written explanation of that.
Preliminary Estimated HUD-1
The HUD-1 is a document used at closing to show all of the expenses, money coming in, and how it is dispersed. An estimated HUD-1 is used with the short sale package to show the lender an estimate of expenses for the transaction that will be taken out of their proceeds from the sale and the net amount that will be paid to them after closing. This is normally prepared by an escrow or title company closer. It must be completed with the full property address, seller’s names, buyer’s names, buyer’s lender information, and an estimated closing date. Because some of the expenses on this document increase over time it is a good idea to make the estimated closing date about 3 months out, since we don’t know how long it will take to get an approval on the short sale. A HUD is not an easy document to understand and was complicated even more by revisions in 2011, so it’s not a bad idea to include a worksheet to assist the individuals reviewing the short sale package in understanding the HUD.
Additional Documents for your Short Sale Package
Because of so much fraud in the past most lenders require a signed and dated IRS form 4506-T to be submitted. This allows the lender the ability to check the IRS records and see that the tax forms submitted are the same as those filed with the IRS.
It is a good idea for the short sale realtor to provide a CMA or at least 3 comparables for the property that substantiate the value. Once listed on your local MLS a copy of the MLS listing sheet and listing history for the property should be submitted by the Short Sale Specialist Realtor.
If repairs are needed on the home, provide 3 estimates for repairs and photos of the damaged areas needing repair. Also photos to show condition if carpet needs to be replaced, etc. is a good idea.
Specific types of loans such as FHA and short sale programs such as HAFA will require additional forms specific to those programs. Check with the lender regarding those documents.
Common Delays in the Process
The most common delays in a short sale process are missing or incomplete documents and missing signatures, dates, and initials. I could write an entire article on the detailed items that cause delays on each of the major lender’s proprietary documents alone. The thing to be aware of here is the fact that any missed signature, signature not dated, or missing initial where required, will cause a delay. Do not leave blanks empty. If the appropriate answer is N/A fill it in.
Also realize that a delay in the short sale process for something as simple as a missing date or initial is not a delay of a few hours or even a day. When a processor at the bank rejects a document for a missing item, that requires the short sale realtor to get the document to the responsible party for completion, the return of the document, and the document to be resubmitted by the short sale realtor. The document then must be uploaded by someone in the document imaging department of the bank, where it waits for a week or more until the file comes back up in the queue for the processor to once again review the file. During this time other documents are becoming stale and may need to be updated by the time the file is reviewed again.
As you can see there is much to be said for submitting a complete package in the beginning, and not giving that employee of the bank any excuse to set the file aside. I am a short sale specialist realtor in Denver Colorado. If you have questions regarding the short sale process feel free to contact me. I am most familiar with the process in Colorado, but I will help you any way I can.