Here are some key points a homeowner should know or remember: 

Reinstatement of Loan.

When Lender files Notice of Default, options for homeowners decline since banks hesitate to reinstate loan after starting foreclosure proceedings. Some lenders may give homeowner time to make payments current, pay foreclosure filing fees.

Options to stop foreclosure. There are quite a few ways to avoid foreclosure besides making up the missed payments

• Sell before it becomes a short sale
• Short Sale.
• Deed in lieu of foreclosure --- deed the property back to the Lender who forgives the mortgage and cancels foreclosure.

Impact on Seller's credit. Opinions vary on the effect of short sale on one's credit. But the bottom line is that it will have a negative impact.

• There may be no advantage to short sale. Impact is near that of a foreclosure and deed in lieu of foreclosure --- a loss of anywhere from 100-300 points on one's credit score
• Seller may have to wait up to 48 months or longer before a lender will agree to extend loan to buy another property. But there could be exceptions depending on how fast the homeowner acts to repair his or her credit.Mo

Mortgage Forgiveness Debt Relief Act of 2007.   This Act will create a three-year window for homeowners to refinance their mortgage and pay no taxes on any debt forgiveness that they receive.

It's been discussed, blogged, taught...and it doesn't hurt to revisit it again.

If it appears that the only available option to the seller is to sell the property as a short sale, it is extremely helpful to prepare him on what to expect: what is a short sale, how to qualify for a short sale, what is the process, timelines, how to prepare his property for sale, and forms he needs to complete.

The seller is already in distress and will not be in the best frame of mind. So it helps when a listing agent walks him through the various pieces of information we need to submit to the lenders, and why it is important to provide a complete short sale package.

What constitutes a short sale package?

• Letter of Authorization - signed by the seller that authorizes the lender to convey information to the lisitng agent or the agent's designate reagrding the loan
• Loan Information - signed by the seller that provides the name of the lender, contact numbers, address, loan number, balance of the loan, and if a notice of default was already filed A separate form is required for each lender 
• Loan payment coupon --- one for each lender, showing most current mortgage statement or current balance
• Hardship letter -- the more detailed the better. Indicate the reason(s) for the default, when the hardship started
• Seller's personal financials -- this will take time, but this is necessary to provide background info on the seller's finances, current obligations, and ability to meet those obligations. Required are: 
  • Financial statement showing income and expenses  --- include everything that seller pays for (household expenses for food, utilities, car payments, insurance, child care if applicable, etc) and sources of income (salary, etc)
  • Two months' most recent statements for all bank accounts and brokerage accounts EXCEPT information on retirement accounts
  • Two months most recent pay stubs or other forms signifying sources of income
  • Two years most recent income tax returns

INCLUDE Property information

• Listing Agreement showing the proposed listing price
• CMA of recent sales in the neighborhood. If there's a chart showing the declining prices, include that witn your CMA to justify the price
• Summary of repairs. If inspections were done that can validate a lower price, such as pest report that shows a high $$ estimate for repairs, include the estimate

When to submit the short sale package?

Although most lenders say they won't open a file until there is an offer, lenders differ in their policies. I've submitted packages BEFORE receiving an offer, and received the name/number of someone I can follow up with. The seller can also call the lender(s) and provide the short sale package once contact is made.

What to include when an offer is received

Most lenders will want the best and highest offer, and may only want to see the top two offers. Be sure to include:

• Complete offer with all the necessary signatures
• Preapproval letter for the buyer
• Proof that the buyer can complete the transaction
• HUD statement showing buyer and seller estimates

Remember that most lenders will approve a short sale only as a last resort to foreclosure for one or more of the following reasons: 

• Borrower’s insolvency
• The proposed purchase price is more than the lender would be able to sell the property after foreclosing on the loan
• The value of the property has decreased to an amount that is below the loan balance due to local and national economic conditions
• The property was refinanced at a higher value based on an inflated property appraisal report
• The property is in such a physical condition that it is not financially feasible for the lender to put it into a marketable condition.

And throughout this process, do everything you can to market the property. The objective is to get the best possible offer to make it possible for the lender to accept the offer and approve the short sale. Keep the distressed property owner infomed. Hold his hand.  Brace him for a long wait.

If it appears that the only available option to you is to sell your property as a short sale, here are things you should know:

Short sale is a type of pre-foreclosure sale in which the lender allows the property securing a mortgage or deed of trust loan to be sold for less than the full amount due, and accepts the proceeds from the sale as payment in full.

Short Sale Approval

Most lenders will approve a short sale only as a last resort to foreclosure because of the following:

• The borrower is insolvent
• The proposed purchase price is more than the lender can sell the property after foreclosing on the loan
• The market value of the property is below the loan balance due to local and national economic conditions
• The property was refinanced at a higher value based on an inflated property appraisal report
• The property is in such a physical condition that it is not financially feasible for the lender to put it into a marketable condition.

Hardship

Regardless of who benefits from a short sale, most lenders have a very strict hardship test that the financially distressed homeowner must meet to qualify for relief by way of a lender-approved short sale.

Hardship could be one or a combination of the following:

• Unemployment
• Reduced income
• Divorce or separation
• Too much debt
• Death of spouse
• Mortgage payment increases (example: negative amortization)
• Business failure
• Job transfer
• Illness and large medical bills
• Damage to property
• Military service
• Incarceration

Your role

• You are not responsible for selling expenses. The Lender pays the realtors to list and sell the property.
• You will NOT get any sales proceeds from the sale
• Set your ego aside about how much your property is worth after what you paid for it, improvements you made, etc.
• Get all the required documents as soon as possible so that your realtor can begin communicating with the lender and marketing your property
• Price the property aggressively to attract the largest pool of buyers so that you can get sell it quickly.
• Remember, that time is of the essence. You only have so much time to try to sell your property as a short sale. So you must maintain the property so that it is marketable
• You can accept an offer and ratify the contract and send this off to the lender; but if another offer comes in that looks better than what was accepted previously, the lender can override the your decision, and accept the offer that is financially better for the lender.
• Escrow is not necessarily opened until the lender accepts the offer ---- and that's when the timeline of the contract begins
• Always encourage and entertain back up offers. Oftentimes, buyers get tired of waiting for the short sale to be approved, and they back out of the agreement

Setting expectations

Short sale is anything but a "short" process

PATIENCE!

• Selling a short sale property is a long tedious process
• Getting a Loan Negotiator assigned to the case will entail many phone calls and other means of communicating
• This is a more involved process than a regular sale
• List price must be very aggressive in order to attract the biggest pool of buyers
• The quicker you get an offer, the better you are protected from foreclosure
• Offers tend to be lower than list price. Don't take it personally
• When an offer is submitted, you can accept...but Lender makes the final decision

PATIENCE!

• Lender may take 45 days or longer to respond to an offer --- accept, reject or counteroffer
• Lender may override the Seller's choice

PATIENCE!  

SAMPLE foreclosure timeline

Here's a look at a timeline from late payment to foreclosure. The timeline will differ depending on lender, location and situation. There is always the possibility of postponing foreclosure, such as when the property owner lists the property for sale as a short sale, receives and offer or offers and forwards the offer(s) subject to lender approval.

• DAY 1    The borrower misses the payment.
• DAY 16-30   A late charge is assessed. The mortgage servicer contacts borrower to find out why the payment is late. File is sent to the Collection Department.
• DAY 45-60  The servicer sends a "demand" or "breach" letter to the borrower who has 30 days to resolve the situation by paying the delinquent amount.
• DAY 90   Notice of Default.  Foreclosure proceedings start with a Notice of Default (NOD). The document is recorded at the request of the lender by the trustee and is recorded in the county in which the property is located. In California, the borrower and junior lien holders are given proper notification and the borrower has 90 days to bring their account current. This period is referred to as the Reinstatement Period.
• DAY 180   Notice of Trustee Sale.   If the borrower does not reinstate their account within the 90 day period, the lender will authorize and instruct the Trustee to record the Notice of Trustee Sale (NOS).
• DAY 196   5 Business Days Before the Sale Date.   Right to Reinstate expires.
• DAY 201          After 21 days of the recording of the Notice of Trustee Sale, a foreclosure sale can take place at public auction. The property may be sold to a third party bidder or revert back to the lender for a specified amount.

RELATED POST When is it too late to save a home from foreclosure? What NOT to do if owner wants to keep the house

Everything is cyclical. Especially in real estate. After the rapid ascent of home values and the frenzied multiple-offer and over-bidding situation in the 2003-2006, we are seeing just as rapid a descent to short sales and foreclosures.

Here are the foreclosures stages:

• Before foreclosure. Homeowners is a distressed stage, looking to salvage finances and credit rating. May negotiate mortgage rate or payment plan, may need to sell home.
• Foreclosure. Homeowner unable to keep up with, or may have missed mortgage payments, has proved to be a hardship case at which point the property if offered as a short sale. Generally, if three or more payments are missed,  and the homeowner has no means to make up the missed payments, Notice of Default (NOD) is filed. Lender is involved. If not sold within a certain period of time, property may be sold at auction.
• Post Foreclosure. Control of the property has transferred either to the Lender's REO (Real Estate Owned Department) or to new owner who bought the property at auction.