Short Sale Basics

Each session will have a 20 – 40 minute recorded training session.
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Each session will have a 20 – 40 minute recorded training session.

Short Sale – A short sale occurs when a lender agrees to accept a lower amount than a person owes on a property, in order to cut their losses and avoid a costly foreclosure procedure. This is usually done when a home owner is in difficult financial circumstances and owes more than the value of their property.

REO – Stands for “Real Estate Owned”, property which is in the possession of a lender as the result of foreclosure or forfeiture.

BPO – Stands for “Brokers Price Opinion”, a BPO is the most common way that lenders, servicers, and asset management companies value short sale and REO properties.

Distressed Property – A property that is in foreclosure proceedings or where the homeowners is in default.

Asset Manager – An individual or company that manages the assets, tangible or intangible, for a bank or financial institution. Asset managers can be responsible for disposition of a lenders assets, and also maintaining the property, ordering BPOs, trashouts, changing locks ect…

Deed-in-Lieu – or “Deed in Lieu of Foreclosure” is a process in which the borrower agrees to deed the property back to their lender in order to avoid the inevitable foreclosure and forced seizure of the property. Most lenders require a property be on the market for 90 days before they will consider a Deed-In-Lieu.

Negotiator/Processor – A negotiator is a generic term used to describe somebody in a lender’s loss mitigation or short sale department who processes, negotiates, or works with short sale files.

Promissory Note – A written and signed note from a borrower agreeing to repay a specific amount of money.

Cash Contribution – A lump sum dollar amount a lender will sometimes request in order to approve a short sale.

MI Company – A mortgage insurance company.

Deficiency Balance – The difference between the proceeds from the sale that a lender will receive and the actual amount owed to a lender after all closing cost.

Hardship – A term used to describe the events and change in financial situation that led the borrower to no longer be able to afford a property.


Lender Approved –A term sometimes used to describe a short sale in which preliminary steps have already been done in the short sale process and the lender has already agreed to a specific price and terms of a short sale transaction in advance of having an offer to purchase the property.


Length Transaction – A term used to describe transaction between multiple unrelated parties acting in their own best interests. This is to insure a property is not sold to a relative, or there are no other side dealings or agreements.

Loss Mitigation – A division within a bank or financial institution that mitigates, or negotiates, the loss of the bank, or a firm that handles the process of negotiation between a homeowner and the homeowner’s lender. A loss mitigation department can handle loan modifications and short sale transactions.

Short Sale Package – A term used to describe the set of documents presented to a lender in a short sale. This can include, but is not limited to, a listing agreement, authorization to speak to a lender, financial documents, offers, Preliminary HUD-1 or net proceeds statements and BPOs among other things.

Cut Losses
High numbers of foreclosures look bad to investors
Can effect relationship with FDIC
Lenders are required to consider them by law in many cases
Below is a chart comparing the effects of a short sale vs a foreclosure on a borrowers current and future credit, employment, and liability. A bankruptcy is not an easy way out, it can be a permanent security clearance issue. A bankruptcy can also effect current and future employment. Some forms of bankruptcy will require the debt be repaid, but should always be discussed with an attorney. If a homeowner is declaring a bankruptcy, they can still do a short sale, it will typically just require trustee approval.
Issue Short Sale Foreclosure
Credit Score
A short sale itself will minimally affect your credit score, usually around 50 points. Late payments usually have the largest negative impact on your credit score from a short sale and can average 30 points or more each.
Your credit score could be lowered 300+ points and will stay on your record for 10 years!
Credit History
There is not a credit reporting item for a short sale. Upon sale, your mortgage company will typically report the short sale as ‘Paid’, ‘Settled in full’, or ‘Paid as Negotiated’ on your report.
A foreclosure will remain on your credit for 10 years and is permanent in the public records of your county.
Current Employment
A short sale is not an actual item on your credit report and typically will NOT affect your employment.
Your employer has the right and many times will actively check your credit if you are in sensitive positions. Sometimes a foreclosure is grounds for immediate re-assignment or termination.
Future Employment
A short sale is not an actual item on your credit report and typically will NOT affect future employment.
Employers do check your credit history for many job applicants. A foreclosure is one of the most negative items you can have on your credit and may affect future employment.
Future Loan with a Mortgage Co.
You typically do not have to declare to future mortgage companies that you previously performed a short sale
On the federally mandated standard loan application form 1003 you will be required to answer ‘YES’ to the question ‘Have you had property foreclosed upon or given title or deed in lieu thereof in the past 7 years?’ Answering ‘yes’ affects the interest rate you will receive
Future Fannie Mae Loan – Primary Residence
After a successful short sale you can be eligible for a Fannie Mae backed loan after only 2 years
After a foreclosure you will be ineligible for a Fannie Mae backed loan for a minimum of 5 years
Future Fannie Mae Loan – Non-Primary
After a successful short sale you can be eligible for a Fannie Mae backed loan after only 2 years on non-primary residences
After a foreclosure you will be ineligible for a Fannie Mae backed investment loan for a minimum of 7 years
Deficiency Judgment
It is typical for the lender to give up the right to pursue a deficiency judgment against the borrower. This is stated in approval letters, and is not legal to collect in many states.
The bank has the right to pursue the deficiency judgment in all foreclosures (except in states where there is no deficiency)
Deficiency Amount
A short sale home is sold at or near market value and in most cases is a greater value than a foreclosure sale which results in a lower deficiency. This deficiency is typically forgiven. Helping to cut your lenders loss as well is also the ethical thing to do.

If the home does not sale at a foreclosure auction it will have to go through the bank REO system. This will result in a longer time to sell and potentially a higher deficiency judgment for the homeowner.

A Deed-in-lieu of foreclosure IS a credit reporting item. It is also a five year flag for a Fannie Mae backed loan. Most loan modifications are also only temporary, as they have a high redefault rate. Knowing the options and being able to explain them to a homeowner is very important.
Loan Modification
Forbearance/Repayment plan
Deed-In-Lieu of foreclosure
Short Sale
Mortgage Insurance Company Approval
Negotiations with a second or third lender
Lack of documentation presented to lender
Lack of preparedness and experience on behalf of agent (bad HUDS/HOA liens/Tax & IRS leins)
Investor Approval
Note that 3rd party mitigation companies are NOT regulated like a Real Estate brokerage company is. If working with a bank in a short sale is too time consuming for an agent, a designated person in a real estate office can easily learn how to process and mitigate short sale files. This can be ideal for accountability and communication purposes.
Unfortunately many buyers back out. Many lenders will “pre-qualify” or “pre-approve” a short sale file once they process and approve the first offer. This is discussed in much more detail in the “Expert Negotiations” training session.
Short sales are typically “As-Is” sales, the seller is in financial hardship and is typically not able to make repairs. Typically there are no home warranties offered, and lender will typically not pay for them.
Lenders also like to see a generous binder/escrow deposit.
In a short sale the borrower still owns the property, and maintains the legal rights of an owner. Despite sellers motives or intentions, the seller has the first and final say so in ALL matters. Legally speaking, it is only up to the lenders to say “yes” or “no” to an offer. An agent works for the seller and/or buyer in the transaction, NOT the bank.
HAFA will help improve short sale timelines. HAFA is the Home Affordable Foreclosure Alternatives plan, part of HAMP, and is an effort to streamline the short sale process. This is very important, as lenders are required to approve a short sale file in ten days. CLICK HERE to view the HAFA plan in detail and to get familiarized with this important legislation. CLICK HERE for HAFA program breakdown and list of participating vendors.
From the time a homeowner misses the first payment, time periods for foreclosure can vary depending on court systems and state laws. Judicial VS Non Judicial foreclosure (Title Theory VS Lien Theory) states have very different practices and timelines. Learn your state foreclosure laws, practices, and timelines! There are also several tactics discussed on delaying foreclosure proceedings in the other sessions.