I have a lot of people call me to get pre-qualified to purchase a home using FHA financing after a short sale. Early on, not a lot of these scenarios panned out but these days, more and more of them do. When they don’t, the number one reason is because they took bad advice from a party to their short sale transaction. That advice? “Mr. and Mrs. Short Seller, you need to be late on your mortgage to qualify for a short sale.”
This is often false and has devastating consequences. In many cases, proving imminent danger of default is all that is needed. Imminent danger of default is defined this way, “a borrower is considered to be in imminent danger of default when he or she is likely to default on his or her mortgage payments within the next twelve months.” Before we get into the consequences of misinformation, let’s review the facts:
1. Fannie Mae does not require a mortgage to be late in order to qualify for a short sale.
2. Freddie Mac does not require a mortgage to be late in order to qualify for a short sale.
3. FHA does require a mortgage to be late in order to qualify for a short sale (stupid).
4. VA uses the “imminent danger of default” rule on modifications but there hasn’t been a clear Circular regarding its use with short sales, . . . yet (and it doesn’t say they need to be delinquent either).
5. PMI providers do not universally require a mortgage to be late in order to qualify for a short sale – some do and some don’t (the trend is leaning towards more not doing it in the future and most of their policies are published on the web).
There is risk in getting this advice wrong both for real estate professionals and home seller’s alike. For seller’s, should they go into default solely for the sake of getting a short approved, they will forfeit their chance to be eligible for buying a home after a short sale using FHA financing for 3 years (or 1 year if they qualify for the FHA Back to Work program). They will also undermine their chances of getting a shorter pre-foreclosure waiting period with Fannie Mae financing if they want to use the extenuating circumstances argument. In short, it knocks them out of home ownership for a minimum of 1 and up to 3 years.
If a seller doesn’t know that they’re giving these opportunities up when they make late payments and should later find out that it may not have been necessary, the person who gave the wrong advice might want to refer to this whole paragraph as the “provable damages” section of this post. Unless the person giving such advice was an informed attorney or the loan servicer, any other might as well be practicing law without a license.
Loan servicers get this wrong quite frequently too although somehow they get kind of a pass on this one. The bottom line is that they need to adhere to the servicing agreements between them and the owner and insurer of the loan. Say for instance your call a loan servicer, . . we’ll call them P.J Chevy Morgan and they are servicing a loan that’s owned by Fannie Mae that doesn’t have mortgage insurance and they say that the loan must be late in order to get approved for a short sale, the solution is simple. Kindly inform them that they aren’t servicing their loan in accordance with the wishes of the owner of the loan and they should review their contract and quit making ignorant statements. And, in the meantime, continue processing the short sale under the assumption of imminent danger of default. If evidence of their mistake is provided (links above), they will proceed. A lot of these people working for servicers are truly surprised to learn that they’re wrong and are accommodating after the fact.
There are two lessons here. Home sellers doing a short sale should do the extra research on the owner and insurer of their loan and look into their policies on “imminent danger of default” vs. true default and real estate professionals should be wary of giving advice on these matters and would do best to carefully and concisely relay communication (with a paper trail) from other parties to the transaction rather than make suggestions. Indeed many real estate professionals are requiring the retention of outside counsel to handle all short sale negotiations and this just may be the wisest course.
Charles Dailey – Branch Manager, Loan Officer, Certified Military Housing Specialist – CA DOC, MN DOC & WI DFI
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