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Short Sales: The Mortgage Originators Role in the Process


A key component to the success of a short sale involves working with a Mortgage Originator who is well versed in the short sale process. The short sale negotiation process is a patience testing task. The complications are many, however if the buyer is securing mortgage financing and is working with an originator that understands that short sale process the buyer and seller can be rest assured, in most circumstances, that the transaction will get to the closing table.

There are 5 key questions to ask when choosing a Mortgage Originator for the purchase of a short sale transaction.

1.) Are they versed in the Anatomy of the Short Sale process?

The proper mortgage origination process pertaining to a short sale purchase is a bit different than a normal non-distressed property purchase. However, it is always my belief that in order to lead the cavalry one must have sat in the saddle. Putting this in terms of the short sale process, in order to originate a loan for a buyer who is interested in a short sale, one must understand the entire anatomy of the short sale process. This includes the challenges that the sellers faces regarding financial difficulty and hardship, the challenges that the selling agents face regarding listing and negotiating the short payoff and most importantly the strict timelines that come along with a short sale transaction.

2.) Will they issue a “TRUE” pre-approval prior to Short Sale approval?

A complete short sale package should include a mortgage pre-approval for the buyer if the buyer is securing mortgage financing to purchase the property.  The originator should have taken a full mortgage application, documented income, assets, reviewed the buyers credit and submitted the file through the appropriate automated underwriting service (ex DU,LP) prior to issuing a pre-approval letter to the buyer.

The pre-approval process for a short sale transaction should not be any different than the pre-approval process in a non-distressed sale. Having said this,  we have closed over 2500 short sale transactions nationwide. Many times, because of the long timeframes that are involved in a short sale, originators are not properly pre-qualifying the buyer prior to short sale approval. Originators are waiting until the short sale is approved by the short selling bank to submit the client profile to underwriting and is some cases to even issue a complete pre-approval. That is too late!  In every circumstance the pre-approval process should be done thoroughly before the short sale approval.

3.) Will they order the appraisal prior to Short Sale approval?

In a non-distressed sale typically, once the purchase contract is signed, the Mortgage Originator or their processing team will then order the appraisal for the property so that it may be reviewed by underwriting. Underwriting will then make sure the property is acceptable as collateral based upon the loan that is being applied for.

This process should hold true if the buyer is buying a short sale. Many times however, the appraisal is not ordered until the short sale is approved by the short selling bank. Often, this will delay the closing timeframes.  Also, consider this, if the short selling bank based upon their appraisal, counters they buyer with a higher price, the buyer who has already had their appraisal done will have the ability to issue a rebuttal based on their appraisal.   The Buyer’s/Lender’s appraisal is a great tool to negotiate value disputes with  short selling banks.

4.) Will they communicate with the Short Sale Negotiator?

There is one line of communication that is a must during a short sale.  This is the communication between the Short Sale Negotiator and the Mortgage Originator. The Mortgage Originator should be in touch with the negotiator on a weekly or bi weekly basis to obtain the status of the negotiation. It is imperative that the originator be informed of such deadlines as closing dates, approval expirations, BPO time lines, contract changes etc.

5.) Will they keep the Buyer engaged throughout the process?

In a non-distressed sale the timelines are usually short from pre-approval to closing. The potential buyer will obtain a pre-approval for mortgage financing; they will shop for a home, make an offer and then close on the property.  Most cases this process takes between 30-60 days.

In contrast, the short sale purchase timeline could take the normal 30 to 45 days of shopping but, from the time a buyer puts an offer on a property to the time they actually close could take 90-120 days. During this time frame, the mortgage originator must keep the buyer engaged. The information gathered in the pre-approval process meaning paystubs, bank statements etc. will need to be updated appropriately so that when the short sale bank issues their approval the buyer is ready to close on time and within the approval guidelines.  All too often short sale negotiators are asked to obtain short sale approval extensions from the short selling bank because the buyer could not close on time. Most of this stems from the Mortgage Originator scrambling to obtain last minute documentation that could have been avoided if the buyer’s credit file was routinely updated throughout the entire short sale process.

In closing, with the abundance of short sale transactions permeating the marketplace, it is imperative that all interested parties to a short sale work with a Mortgage Professional that understands this segment of the marketplace. By keeping the 5 questions above in mind, you may alleviate the possibility of a short sale transaction failing because of buyer financing falling apart.

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Christopher Reale

About Christopher Reale

Christopher Reale is the Director of Short Sale Operations at Lepizzera and Laprocina and is the Co-Founder of The LepLap Institute. Since 2007, Lepizzera and Laprocina has successfully negotiated over 2,500 short sale transactions. The LepLap Institute is the issuer of the Certified Distressed Property Lender™ (CDPL) designation. For more information, go to www.CDPLender.com.

One Response to “Short Sales: The Mortgage Originators Role in the Process”

  1. GreggCesario May 15, 2012 at 11:41 am # Reply

    Chris,

    Interesting to hear the perspective ofthe short sale negotiator about the process.

    I am an NMLS license holder and licensed Real Estate Broker in FL and would like to comment about a couple points you made in your article from an LO perspective and experience.

    Point #1 - Agree completely

    Point #2 - Unfortunately, what you are labeling a pre-approval is really a "committment letter" from a lender.  A pre approval letter is not the same thing. 

    Actually RESPA directs that pre-approvals should be issued without a credit pull and the normal rigors of loan qualification / committment.  They indicate pre-approvals should be issued based on borrower input with minimal documentation without a credit pull.  The window for multiple credit pulls with out a credit hit has been extended from the former 14 days to 45 days.  Unfortunately even with that increased window opening, it often falls outside the time frame it takes short sales to close.  Each  "hard pull" for the borrower(s) reduces their score(s) between 4-6 points outdise this window.

    The problem with obtaining a committment letter is they are time stamped.  If the short sale process is protracted, it may take longer than accepted credit or documentaion guidleines of 90-180 days depending on the document.  Most lenders do not want to issue a committment letter until there is a firm close date and most will not issue a committment letter until the lender of record issues a letter stating such.

    Point #3 - Appraisals are rarely done, if ever, in advance of a lender "committment" especially in a short sale as you state.  Most appriasals are done only when the fully executed contract is produced by the buyer.  While it may look as though a short sale is fully exectued by buyer and seller, it is incomplete without the lenders LOA (Letter of Authorization).

    There is little to no value in obtaining a bank ordered appriasal because they have a time stamp as well that risks expiration and the double the cost to the buyer of reappraising the property. Having an appriasal with an earlier date is a risk and not an advantage in my experience without first receinving an LOA from the lender of record.

    Point #4 -  Agree completely

    Point #5 -  My short sale completion experience often far exceeds your projected timeframe but that probably varies by state and inventories.  My expereince in FL reflects that many buyers abandon a couple short sale properties for a number of reasons and move on to other offerings (distressed or non distressed).  Many of the short sale property activity is running parrallel and not in series to legal foreclosure proceedings.  Once a property clicks over to a foreclosure declaration, all short sale activty is invalid. 

    Closing:  Your perspective is acurate for the most part and well founded.  It was interesting to hear a negotiators perspective and hopefully you and your readers will be interested in hearing an LO's perspective about short sales as well as mandated rules to which we are accountable.

    Call me if you have any questions.  561 265-8851
    Gregg Cesario
    FL Loan Officer # MB100005952NMLS Loan Officer # 283870FL Real Estate
    Broker # BK524947

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