A preapproval is important because:

Sellers won’t accept an offer without a preapproval. Preapproval means that you have spoken with the lender, you have made an application, they have checked your assets and liabilities, they have run your credit. A prequalification means you called them and based on what you told them, they gave you a letter. Prequalification is NOT what a seller is looking for.
It helps us to know your options when we are searching for your new home. It is very frustrating to find a home you love, and then have a lender tell you that they will not be able to give you a loan for that property based on your credit, income and liabilities.
Knowing the type of loan(s) that you qualify is very important. FHA and VA contracts are not preferred by sellers. Yes, sellers will accept FHA and VA, but they prefer conventional or cash transactions. The main reason for this is the FHA and VA appraisals. Those appraisals are designed to protect the buyer. They often are lower in value, than a conventional appraisal (which can mean that the seller either has to lower the price or find another buyer). Once an FHA appraisal has been done, it carries over to the new FHA buyer. They don’t have the opportunity to have a new appraisal done, if it’s within 3 months. FHA and VA appraisals often require that certain repairs are done by the seller. Once again, this is for the protection of the buyer. FHA and VA wants the buyer to incur as little as possible costs after they purchase their new home. Conventional appraisals may not require those same repairs. I have noticed lately, though, that conventional appraisers have tightened their standards.
Here is a list of lenders, and their contact information, that we trust:

Laura Triplett
Vice President – Branch Manager
Suntrust Mortgage
Office: 703-492-5057
Mobile: 703-919-3679
Fax: 703-494-1484
Laura.Triplett@SunTrust.com
www.suntrustmortgage.com/ltriplett (Apply online)

Laurie Thurston MacDonald
Branch Manager
Military Certified
Leaders Club Member
Wells Fargo Home Mortgage
MAC M8602-031
7620 Little River Turnpike; Suite 300
Annandale, VA 22003
703.333.5581 Tel
800.385.8671 x 5581 Toll Free
703.400.7092 Cell
703.642.3724 Fax
laurie.thurston.macdonald@wellsfargo.com
http://www.wfhm.com/laurie-thurstonmacdonald (Apply online)

Mark Ellmore
Bank of America
mark.ellmore@bankofamerica.com
(703) 517-0522
(Mark will be glad to take your application over the phone)

The bank has foreclosed on the property. The previous owners couldn’t or wouldn’t make the payments (yes, that does happen).

In Virginia, the property is sold at auction (a Trustee sale). If it doesn’t sell to an individual or investor at auction, the bank buys it. The bank buys the property if a. no one shows up for the auction, or b. the offers that are made are lower than the bank feels they can get if they market the property through a REALTOR.

Once the property is bought by the bank at auction, they hire a REALTOR to do a BPO (broker price opinion). A BPO is basically a REALTOR appraisal. It’s not an appraisal your lender would use, but it gives the bank a general idea of for how much the property will market.

They may hire that REALTOR or another REALTOR to market the property. The REALTOR that the bank hires, will list the property on the MLS, put up a sign and wait for the offers to come in.

Quite frequently, the bank will market the price at a lower price than the BPO. They do this in order to create competition for the property. When they create competition for the property, it drives the price up.

The bank generally does NOT accept a low ball offer. There are some exceptions (if the property is in horrible condition or has been on the market for a long time without an acceptable offer). In many cases, the bank has already taken into account the condition of the property. Please keep that in mind.

In today’s (Sept. 2, 2009) market, if you are interested in making a low ball offer, save yourself and your REALTOR the time. The bank’s won’t accept them. Each property that my client’s have written offers on, over the last year (for the most part) have had multiple offers.

I just wrote an offer for a client on a bank owned, single family, property in Alexandria, VA. The bank listed the property at $138K. That was VERY low for that property. We knew that. I do the comparatives (comps) for my clients to see what the homes are selling for before we make an offer.

We made an offer of $200K, 20% down, conventional loan, no contingencies.

We WERE NOT even close. The highest offer the bank received was $268K. It was an FHA loan. The banks don’t necessarily prefer FHA loans. Keep reading for more info on that.

The bank accepted an offer that was lower than the highest offer. They accepted a conventional loan around $250. That particular property sold for $112K more than list price.

Is that common? No. Does it happen? Yes.

What is most common? 20K to 70K over list price.

Are some houses sold at list price or below? Yes. If the offer is made quickly (same day). If the offer is competitive (not a low ball offer), and gives the bank what they want, we might have a chance.

Some banks do not look at any offers for 5 days.

Do all banks work the same? No.

Do all listing agents for REO (real estate owned – foreclosures) work the same? No.

How do we know which offer to make? My best advice for any property offer is to make the best offer that you can with the best terms (price, type of financing, amount of earnest money (emd), settlement date, amount of down payment, and contingencies).

If you’ve done that, then the best is all you can do. In a market like this, it’s important to keep in mind that there will be another house. You may like it better or worse, it may be more expensive or less, but there WILL be another house.

Word on the street, (in the news) is that the WAVE of foreclosures is supposed to hit the market. If that WAVE of foreclosures hits, it will change the dynamics of the market.

Right now, there are many buyers trying to get in on the low prices, low interest rates, and $8,000 home buyer credit that ends Nov. 30. If you are one of those trying to get in on the credit, we have to settle (go to closing) on yyour new home, before Nov. 30. Not Dec. 1, not Dec. 2. November 30, is the deadline.

Now, having said that, word on the street is that there are over 15 bills before Congress that will extend the home buyer credit. Some of them call for more money. Some of them call for the credit to be used by more than first time home buyers. Many just extend, basically, what we already have.

I think it is most likely that they will extend this credit. If the amount of homes hit the market, that they are expecting, we’re going to need every incentive we can find to get those homes sold and quickly.

The market over the last few months has increased. That was due to the moratorium (putting foreclosures on hold, so they could work out loan modifications or short sales) that President Obama instituted earlier this year.

It helped. A good many homeowners that were slated to lose their homes, have been able to keep their homes, or short sale them.

Because we had the moratorium, there were fewer homes. With the home buyer credit incentive, there were more buyers. Fewer homes, increased buyers equals bidding wars. Home prices increased.

OK. We covered that. Moving on.

We find a property you like and we make an offer. With banks, there generally is little or no counter offering or negotiation. Your offer is your offer. Do not make the mistake of thinking you can make a better offer later. There is no later. This is it.

With many banks, they will after a number of days, ask for “highest and best and final”. That gives us 1 more opportunity to improve our offer.

At that point, the bank will accept the best of the bunch based on their criteria and they’re done.

Once we have an offer accepted by the bank, the bank will issue their addendum(s). Their addendum(s) basically state that the property is sold “As-Is”.

As-Is means the bank isn’t going to make any repairs. And some banks hold to that stance.

The addendum allows a “home inspection period”. This period ranges from 5 to 10 days depending on the bank/servicing company.

We will do a home inspection and if item(s) are found that you feel are more than you might be interested in repairing, we can get out of the contract and you get your emd back.

If you choose to move forward with the contract, your lender may require some repairs. If you have an FHA or VA loan, this is most likely. That’s one reason banks prefer conventional, rehab loans or cash.

The interesting part of that equation is that conventional lenders have greatly tightened their underwriting standards. They are requiring many of the repairs that a VA or FHA appraiser would require.

I have had transactions where the FHA or VA appraiser didn’t ask for repairs that we thought they would. If they do not ask for those repairs, and you want those repairs made, we can ask the underwriter to have the appraiser amend their report showing the items you would like repaired. (I can tell you that doing this will delay closing for a month or more), even if it is a simple repair. There is a process the banks go through, and it takes a long time.

The 2nd option is to go to closing and you can do the repairs once we’ve settled.

Depending on the repair, your budget and your level of comfort with the item(s) that need repair, we can make that decision at that point.

I’ve had clients that went with option 1 and I’ve had clients that went with option 2. I give you options, you are the buyer, you make the decision.

Once you’ve decided that you want to buy the property in the condition that it is in for the price that you offered, you will need to contact your lender and let them know you have an accepted offer. At this point, you will need to provide your lender (promptly) with any documents they need. I will forward the “ratified” (seller has signed, you have signed) to your lender and the title company.

One of the differences, bank vs. seller owned, is that it may be 7 to 10 days before we get a “ratified” contract. Some lenders will not move forward with the contract until they have the sellers signature. If this happens, we may need to extend closing. We will need to do an “addendum” stating the new closing date. Some banks may require a “per diem” (per day) dollar amount for doing an extension. I’ve never had a buyer who had to pay it. I’ve had some banks say they were going to charge it, I’ve had some try to charge it, we always appealed and got it removed.

Your lender will order an appraisal.

You will need to purchase 1 years homeowners insurance (unless it is a condo), from an insurer of your choice. Many clients use the same company that they have their auto and/or life policy with. The insurer will most likely give you a multi-line discount.

In Virginia, a survey is not required. Some lenders require a survey. If they do, the title company will order the survey. If your lender does not require a survey, they will ask us if we want one. It will be up to you. A survey is a map of the boundary lines of the property showing the house and any other buildings, fences, etc. The survey is more important when you have a single family home. There could be your neighbors shed or fence on your property. Your shed or fence could be on their property. It will also show, if applicable, any easements (rights you and others have to use portions of the property).

The bank will, in most cases, pay the title insurance for you. They will NOT cover the lenders policy, however. Fannie Mae does NOT pay title insurance. Most of the banks do, however.

Banks will, in some cases, pay a portion or all of your closing costs. Your closing costs will be paid at settlement and include your lenders charges, the title company (settlement company) fees, county and city fees, and any other charges related to the transaction.

If we are trying to “improve” (make better) our offer, we may not ask for as much or any closing costs. Whether or not we ask for closing costs depend on several factors. 1. Whether or not you have the funds to pay your own closing costs, 2. how much the closing costs will be, 3. what the competition from other buyers is.

We will get a “gfe” good faith estimate from your lender. The gfe shows the lenders expected charges and customary settlement company fees. This is an estimate. This can be off by thousands of dollars, depending on which loan product you choose and when in the month you settle (end of the month is lower closing costs).

The end of the month has lower fees because interest is paid in arrears (or backwards). It is not like rent. Rent is paid forward. You pay it at the front of the month.

Mortgages are paid backwards. When we close on the property, you will pay any interest due from that day to the end of the month. If we settle on the 29th and there are 30 days in the month. You would pay 2 days interest. Your next payment would not be due until one month later. If we settle October 29th, your first payment will be due on December 1st.

Sometimes the closing is delayed due to an issue with the property or the bank. They may not have recorded the deed. I had one closing that was delayed due to the HOA (homeowners association) filing a lien on the property that no one discovered until the day before closing. It took a week to get it straightened out. My buyer was ready, the bank was not.

And, no, they don’t give you money to delay closing, no matter what expenses you may incur.

When the lenders are backed up with mortgage applications, they take longer to get the loans to closing. This is your lender. FHA loans take longer, allow 45 days. That’s another reason banks don’t prefer FHA loans: longer processing time.

Once your lender has gathered all of the documents they need to approve the loan (or that they think they need), they send your file to “underwriting”. Your file is then closely looked at, every item gone through very carefully. They will look at your tax returns to make sure that the income you claimed is the income you made. They will review the appraisal for any items the appraiser may have noted. Their role is to make sure you can afford the property and that the property which you have chosen has the value for which they are giving you the loan.

I had one transaction where he claimed a certain number of wages. He actually made, on W-2′s, the amount he said. However, he claimed unreimbursed expenses. The unreimbursed expenses decreased the income he said he made. At that point, he no longer qualified for that particular type of loan.

We had to change loan products, not lenders, and closing was delayed while the file was rewritten and then it had to go through underwriting, again.

There are multiple people involved with the transaction other than the ones you meet. You meet your agent, and your lender. You don’t meet, in a bank owned transaction, the listing agent or the seller. The only ones at closing are you and I and the closer.

The other “parties” (people) involved are: the appraiser, the processor and the underwriter. There can be other parties, as well. These parties you will not meet, or even speak with, in most cases.

I have had clients that “ran into” the appraiser at the property. That is not common, and not recommended. The appraiser likes to be unbiased in their findings. They like to be anonymous. I don’t even know their name in most cases, until we see the appraisal report.

Your lender will order title. The title company will do a title search to make sure there are no liens or issues with the title and there are no outstanding charges related to the transaction.

Your lender will submit documents to the title company. The title company will draw up the HUD1. They will submit it to your lender and sometimes, simultaneously, to the seller.

The bank will often request that prior to your closing date by 24 to 72 business hours. The seller may have changes to the HUD1. If they do, it will go back to your lender, who will agree or change, and send it back to the title company.

The HUD1 is the settlement statement that shows all of the lenders, title, county and other relevant charges. It’s similar to the good faith estimate that your lender provided for you at the beginning of the process.

Quite frequently, I do not get a copy of the HUD1 until the day before or day of closing. We will need to get the amount of the “certified funds” (bank check) that you will need to bring to closing from your lender. He/she should have a fairly close idea of how much those charges will be.

If you bring too much, the title company will give you back the difference. If you bring too little, you can write a personal check for amounts under $1,000 (with most title companies).

And, finally, if it all comes together, if all the parties have done their job, and all agreed to the same terms, we go to closing. We will need to set a time for settlement a couple of weeks prior to closing.

If everyone is agreed at this time, we will meet at the settlement company. We will, as a group, You, I, and the closer, review the HUD1. There may be changes at this point. If so, they will make any changes to your charges, they cannot change the sellers (banks) charges, and you will sign the HUD1.

This is where the fun starts, unless you paid cash.

There will be a package of paperwork from your lender. This could be 30 pages, it could be 60 pages.

Once you have finished signing the HUD1 and your lenders documents, we will be finished with the closing. With most banks, we will have already gotten the key from the lockbox or you will leave closing and go get it from the lockbox.

I did have one closing where the bank would not release the key until the transaction funded (the lender gave the title company the money) and the transaction recorded at the courthouse. Due to it being a holiday weekend, it was several days after closing before they could pick up the key. In addition to not being able to use the holiday weekend to move. Quite frustrating. This has only happened 1 time, though, out of almost 50 bank owned closings that I’ve had.

There are several numbers involved in the transaction as well. I am often asked the difference between appraised and assessed value.

1. appraised value. A trained appraiser uses recently sold (less than 3 months) to reach a value he/she feels the property is worth. He fills out a Uniform Residential Appraisal form and gives values to the differences between the properties. He will add to one and subtract from another to give them the essence of being the same. If one has a deck, and the other doesn’t, he’ll take from one value and give to the other.

2. assessed value. The assessed value is a value that the county puts on a property. They do not go inside the property. They can only use what another property in your neighborhood sold for and they generally place the same value on all of the homes in a neighborhood that are similar. This is done once a year. Your assessed value and appraised value can be different by tens of thousands of dollars and really has no relation to your offer price.

3. Listing price. The price that the bank/agent/seller places on the property. This number is usually reached by doing a cma (comparative), using the last 3 months solds (like an appraiser would). Individual sellers often add a bit of emotion into the price, which is generally not relevant to what a buyer who is ready, willing and able would pay for the property.

4. Offer price. This is the price that you, the buyer, would like to pay for the property.

5. Sales price. The final price that both you and the seller have agreed to. This is the price that the property, if you are financing, has to appraise for. If the property does not appraise, you have 3 options. 1. the bank reduces the price, 2. you pay the difference, 3. the deal goes away and you get your money back. I’ve had all 3 happen, depending on the circumstances.

Hopefully, this very long and somewhat detailed explanation helps. There are many variances and no 2 transactions are the same. Every buyer, every house, every lender, every bank, every different factor, makes each transaction like no other.

I’m going to be covering questions that I’m frequently asked. If you have a question that you would like for me to answer, please email me and I’ll be glad to post a blog that answers that question.

The first question that I’d like to cover is “What is a short sale and what is the short sale process“? This is a long blog. There are a lot of items to cover.

A short sale is when a seller wants to sell their property and they owe more to their lender, or lenders, than they can get for the property. They are asking the bank to take a “short sale”, meaning they want them to accept less than what is owed.

There are many factors to consider when making an offer on a short sale.

1. How many lenders? 

a. If there is only one lender, they may have PMI (private mortgage insurance) on the property. If they have PMI, the insurer will need to accept the short pay off. Many PMI insurers are unwilling to accept the short pay off. Deal doesn’t go through. The other issue with loans with PMI is that the lenders receive less money if they accept the short sale. If they let the property go to foreclosure, they file for the PMI. They make more money, if the property goes to foreclosure. Sad, but true.

b. If there are 2 or more lenders, the 2nd (and 3rd) lenders will generally require a cash payoff of those trusts. In many cases, the seller doesn’t have the funds. The buyer may not have the funds to pay a 2nd trust (or be unwilling to pay the trust off). The amount of the 2nd trust payoff is separate from the 1st trust, and not part of an appraisal on the property. So the deal falls through.

2. In many cases, the primary lender (1st trust) will require the seller to sign a “deficiency note”, it’s a promissory note that is generally for 15 years and pays off the difference between what the property currently sells for and what they owe. Most sellers (all that I’ve run into, so far) will not agree to pay on a property they no longer own. So the deal falls through.

3. Another part of the process is that the investor for the lender(s) have to approve the “short sale”. Some will not. So the deal falls through.

4. They take a long time. Many buyers, in the meantime, find another property that they like and withdraw the offer on the short sale. If you love the home, we can make a back up offer. If the primary offer falls through (which is common), our offer will become primary.

I wrote 2 offers for clients in April, at the time, they were both back ups. Within a short time, the listing agents contacted me and asked me if the purchasers were still interested. In both cases, they were. We had our offers signed by the sellers and submitted to the bank for review.

One of them has 2 trusts with Bank of America (we are having the buyer pay off the 2nd trust in cash, at closing). The other loan only has 1 trust, the seller had put down a larger deposit, so there was no PMI (over 20% down payment on a loan means you don’t need PMI). The one with 2 trusts has bank approval, now, and hopes to close at the end of August. On the 1 trust loan, the negotiator dropped the ball, so we still don’t have approval.

I’ve had offers that were bank approved, we set a closing date, and didn’t go to close. The investor, in 1 case, wouldn’t approve the short sale. In the 2nd case, the seller wouldn’t sign a deficiency note. In both cases, my purchaser was ready to buy the property and had everything ready to go.

5. They are sold “As-Is”. The seller has no money and can’t make repairs. They are not able to give you a credit at closing for repairs. The lender may not be willing to give you a credit for repairs or make any repairs that are necessary as part of YOUR lender’s appraisal requirements. This often rules out FHA and VA buyers. Conventional lenders are getting just as stringent on the condition of the property. You may need a “rehab loan”. That’s a different blog.

6. The seller will NOT be able to give you any money for closing costs. The lender MAY agree to pay a portion of the costs: some will, some won’t. Very few pay all of the closing costs. This rules out some of the FHA and VA buyers, as well.

7. Another big factor is “Who is the lender?”. Some of the lenders are smaller and have more efficient short sale processing. Some, like IndyMac and Bank of America, are swamped. They are inefficient and they are very slow to respond.

8. If you have a specific time frame for being in your new home, DO NOT make an offer on a short sale and not write an offer on anything else. The likelihood of a short sale going through is only about 3 in 200. That’s not a good enough ratio for me to recommend that you not proceed with other offers.

9. The lender may counter your offer at a much higher price than you offered. I had a short sale that was very close to bank approval, the lender asked for the purchaser to pay $20,000 more than their offer. The purchaser decided not to buy the property.

Now, having said all of that, not all short sales are created equal. I had one instance where the seller had written bank approval, I had a cash buyer, we closed in 7 days. WOW! That was awesome!

So … do I write offers for clients on short sales?

YES!

Do I recommend that the you keep looking and make an offer on another property?

YES!

Do I let you know that if you are willing to wait for months and months and still not get the property, are you going to be OK with that?

YES!

My best advice is “Sure! We’ll write an offer on a short sale,” but only if you’re willing and able to pay the 2nd trust in cash (if applicable), you’re willing to wait a long time for the answer (and then the answer might be “No”), you’re willing and able to make any repairs that the home may need, and you’re willing and able to pay your own closing costs.

Some listing agents choose 1 offer to work with (this is usually the lenders preference), other agents send all of the offers. Some listing agents use title companies and/or attorneys to negotiate the short sale, some of them have “in-house” administrative associates who do the negotiating, some do the negotiation themselves. I have found that the listing agents that use 3rd party (attorney/title companies) have smoother transactions, shorter wait times, and more likelihood of getting the short sale approved.

Can I or you talk to the lender? NO! The lender has to have written approval from the seller in order to speak with anyone about the loan. I’ve never met a seller that would agree to have their information shared with the other agent/purchaser. It also mucks up the process. The listing agent, with all hope, is following up with the negotiator on a regular basis. Let them do their job.

What is the short sale process?

1. We write the offer.

2. The seller approves the offer.

3. The listing agent sends it to the bank(s) for approval.

4. The lender (bank) does a BPO – broker price opinion. It’s a REALTOR appraisal and not one that you would use for your lender.

5. The lender reviews the bpo and your offer.

6. They decide whether to reject, accept or counter your offer.

7. You decide whether to reject, accept, or counter their offer. If you counter at this point, the whole process starts all over. The bank does another BPO and weeks go by before we have another counter offer.

8. The investor for the lender and/or the PMI insurer decides whether or not they can accept the “short sale.”

9. You are issued a rejection, or written approval. I’ve seen banks not approve another of the offers, and the property goes to foreclosure.

10. If they rejected the offer, we find another property. If they accepted the offer and issue a written approval, you start the process with your lender. That’s a separate blog.

11. If they accepted your terms and your lender approves the loan, we go to closing and you move in your new home. YEAH!

If you have any other questions about short sales, please feel free to contact me at angela.foley@drodio.com. I will be happy to respond, promptly, to your questions.

Make it a Great Day!