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Lender Requirements in a Short Sale Transaction

Articles from The Massachusetts Focus

Newsletter of Stewart Title Guaranty Company, Massachusetts Offices
Summer 2008, Volume 7, Number 3

Lender Requirements in a Short Sale Transaction
by Craig J. Celli, Vice President and State Manager

The lender will require the following in a short sale transaction:

1) Property Information

The lender will want some information about the property, the borrower and the deal he has made with the investor (if any). Specifically, the lender wants to know what the property is worth. The lender will generally hire a local real estate broker or appraiser to evaluate the property (called a broker’s price opinion or “BPO”). You can also submit your own appraisal or comparable sales information. In addition, you will want to offer as much specific information about the property as possible that supports why the lender should consider the short sale. Include relevant information, such as newspaper articles portraying supporting news about the neighborhood or economy. Also, submit a contractor’s bid for repairs. Of course, you will want to submit the highest bid you can obtain.

2) Financial Information of the Current Owner

The lender will also ask for financial information about the owner. Sort of a backwards loan application, the owner must prove that he or she is insolvent and unable to afford the payments. The owner must show that he or she has no other source of income or assets to repay the loan. This process may involve as much, if not more, paperwork than an original mortgage application! The owner should submit a “hardship letter,” which is basically a story about how much financial trouble the owner is in.

3) Written Contract

The lender generally wants to see a written contract between the buyer and the seller. The lender wants to make sure the seller is not walking away with any cash from the deal. Generally, the contract must be written so that the buyer pays all costs associated with the transaction, so that the “net cash” to the seller is the exact amount of the short pay to the lender.

4) Preliminary Settlement Statement

And finally, a preliminary HUD-1 settlement statement is often requested. Prepare the HUD-1, and simply write “preliminary” on the top. The lender wants to have a solid idea of what the final proceeds may be. It is important to put in as many of the expected costs as you can speculate. Estimate costs liberally. If there is a major difference between the proposed proceeds and the final disclosed proceeds on the HUD-1 at closing, the short sale process could stop right at the closing table.