Short Sales & 2011 Regulations
If a homeowner does not qualify for a loan modification and is unable to retain their home for other reasons, then the homeowner might consider a short sale. Short sales can also be utilized for investment properties 1-4 units as well.
Q. What is as Short Sale?
A. A short sale is when the real estates sales transaction does not pay off the sellers real estate mortgages. The lender is accepting less than the total amount due for pay off.
Q. What is a "Cooperative Short Sale"?
A. A cooperative approach to a short sale may provide the quickest route to a short sale decision if you begin the process early enough, such as during the realtors discovery conversation with a homeowner. A cooperative short sale provides terms of the short sale before marketing the home. For example, list price, commission, deficiency, etc.
Q. What documentation is needed for a Short Sale?
A. The seller needs to provide a signed third party authorization. The authorization allows the bank to talk with those people authorized to discuss the finances of the seller. The seller will want to provide authorization to the listing agent and escrow agent.
Then the following documentation is required for the lender to provide a final short sale approval:
"Signed copy of the listing agreement and purchase contract from new buyer.
"Hardship letter from the seller
"Copies of sellers last 2 years tax returns or signed IRS form 4506-T form (Request for Tax Return-requesting past two years)
"Copies of sellers last 2 months bank statements
"Copies of sellers last 2 months pays checks
"Sellers personal/household financial statement
"Agent statement of value
"Estimated HUD 1 (provided by escrow company)
Q. How long does the short sale approval process take?
A. Some banks approve short sales in 30 days, while others can take 90-120 days. The process has improved.
As of January 1, 2011 the passage of SB931 has taken effect. This law prohibits lenders (1 deeds of trust) from going after the "deficiency balance" in a short sale.
Q. What is a deficiency judgment?
A. A deficiency judgment is a judgment obtained by the lender in court against the borrower for the difference between the unpaid balance of the secured debt and the amount produced by sale or the fair market value of the security, whichever is greater, in a judicial foreclosure. (Cal. Code Civ. Proc. 726(b).) A lender may obtain a deficiency judgment only with a judicial foreclosure. With a trustee's sale foreclosure, the lender cannot go after a deficiency judgment.
With a short sale, except under certain circumstances---see next question, the lender may demand the balance still owed on the note that the sales transaction did not cover (e.g., short sale of the property pays the lender $120,589.23 but the full amount owed on the note is $250,000). This difference may be referred to as a "deficiency balance". It is not really "deficiency judgment" since no court has issued such a judgment as part of a judicial foreclosure.
Q. Under what circumstances is the lender prohibited from going after the "deficiency balance" as defined in the above question after a short sale?
A. With passage of SB 931, effective Jan. 1, 2011, after the short sale of a residential property of one-to-four units, the holder of the first deed of trust (or first mortgage) cannot pursue the borrower (seller) for any deficiency under the note. If the lender consents to the short sale in writing, the lender is obligated to accept the sale proceeds as payment in full and the note is considered fully discharged. The borrower (seller) is protected even if the loan is refinanced as long as it's secured by a first deed of trust. (Cal. Code Civ. Proc. 580E (a).)
However, this law doesn't apply to junior deeds of trust. Thus, the borrower (seller) may still be liable for the deficiency balance on those loans.
An exception to SB 931 occurs if the borrower (seller) has committed fraud with respect to the sale of the property or has committed "waste" of the real property (e.g., severely damaged the property) (Cal. Code Civ. Proc 580e (b)). Under these circumstances, the borrower (seller) may still be liable for the deficiency balance.
The new 2011 law regarding No Short Sale Deficiencies can be summed up as follows:
Applicability:
One-to-Four Residential Units -Yes, it does apply
5 plus Residential Units - No, it does not apply
First Trust Deed - Yes, it does apply
Second Trust Deed - No, it doesn't apply
Purchase Money Loan - Yes, it does apply
Rate-and-Term Refinance
Cash-out Refinance/Owner Occupied Home - Yes it does apply
Cash-out Refinance/Non-owner Occupied Home - Yes, it does apply
There are two exceptions to the new No Deficiency Judgement
After a Short Sale law for 2011 (Senate Bill 931) are:
1.Fraud
2.Waste
***the above is taken from the C.A.R. Webinar on new laws for 2011***
Due to my background in Banking, Real Estate Lending, I have a complete understanding of the entire transaction process. Use an experienced Real Estate Agent with the CDPE certification (Certified Distressed Property Expert)