Win The Waiting Game On “Short Sale” Inspections

Q: My daughter made an offer on a house, which the seller accepted, but it is a short sale and now we are waiting for the bank to accept the offer. In the meantime, the seller wants us to get the home inspection done so she is not inconvenienced. I think she will be wasting her money if the bank does not approve the offer.
I know it can take the bank a long time to approve, but we wouldn’t get an inspection done if a seller did not accept the offer on a non-short sale. We are prepared to wait. Is this unusual to have an inspection done on a short sale before bank approval?
A: It is unusual, though there are situations in which it might make sense, as when the property seems as though it might have some major damage that the buyer has built into a low offer, and both parties agree that the inspector’s documentation of that damage might help the bank understand the contract price.
The reasons short-sale transactions die so frequently are numerous: •sometimes the bank simply refuses to green light the deal; •sometimes the bank demands a higher price from the buyer or contribution from the seller than the parties are willing to pay; and •sometimes the lender or servicer holding the first loan is fine with the terms, but the second and/or third lenders balk.
One of the most common reasons short-sale transactions die has to do with the fact that the waiting period for the bank’s approval can seem interminable; with so many homes on the market, some buyers simply see another property they like, make an offer, and walk away from the short sale in the months of uncertainty that can elapse while the seller’s bank is processing the short-sale application.
Long story short: It’s good that you’re prepared to wait!
And waiting is also a wise course to take when it comes to obtaining a property inspection or any of the other services that will create out-of-pocket expenses for you and your daughter, for several reasons.
1. Buyer can’t recoup inspection fees if the deal falls apart. First, and most obviously, the deal could fall apart. If it does, and you haven’t obtained inspections, you’re not out any cash. If it dies and you’ve obtained a property or pest or roof inspection (or all three) you could be out anywhere from $250 to $1,000, depending on the inspections, the area and the size and type of the property.
2. Seller might trash the place if she thinks inspections are over. The second reason your daughter may want to hold off on inspections, at least until the bank approves the transaction, is because the bank’s approval process could takes six or eight months, which is not out of the ordinary. Imagine all that can happen to a house in that period of time!
A buyer recently bought a short sale in a process that took about seven months. His own personal walk-through of the property after his offer was accepted by the seller revealed a home in tip-top shape.
Seven months later, though, the sellers/owners had essentially trashed the place, to the extent that the carpet had to be replaced, cabinets refinished, install new floors, and paint every room in the house just to get it back to the shape it was in when he first saw it.
This is not the rule, but some owners of homes being short-sold cease all home maintenance — and even worse — once they feel assured that the buyer is in the deal for the long haul. Holding off on your inspections might create an incentive for the seller to keep the place in good shape for longer than she might otherwise.
3. Buyer’s commitment to the property may escalate, even irrationally so, after paying for inspections. Assuming your daughter is financing the home, the appraisal will also require an on-site property inspection. However, appraisals expire, so this should absolutely not be done until the bank approval is complete.
Having the property inspection at or near the same time as the appraisal would essentially eliminate any additional inconvenience to the seller, so I suspect her protestations of “inconvenience” are a pretext for something else.
Frankly, I believe that what might actually be going on is that the seller might want to boost your daughter’s commitment level to the property, so that she is more inclined to hang in for the many weeks or months it may take to get the bank’s approval, and less inclined to find another property.
Some might say they just want to make sure your daughter finds out everything there is to know about the place sooner than later, but sellers who have that (valid) concern generally obtain their own property inspections before listing the property and make those reports available to all buyers who even view the property.
There’s a psychological phenomenon called “escalation of commitment,” whereby we get more and more committed to a course of action or a decision and less likely to pull the plug on it, the more we invest in it.
The seller might believe that if your daughter spends a few hundred bucks (or more) in this not-certain-to-happen transaction, her commitment to the property will intensify, even in the face of irrational demands or delays.
And the seller might be right.
Based on the information provided, your daughter should wait to obtain property inspections, appraisals, and any other fee-incurring expenses related to this particular property until the seller’s bank has signed off on the deal.
If the seller insists that this is an issue of convenience, offer to have the inspections completed so long as the seller agrees, in writing, to pay your daughter back for the inspections if your daughter backs out during her contingency period or the transaction falls out of escrow for any reason.
Tara-Nicholle Nelson is an author and the Consumer Ambassador and Educator for real estate listings search site Trulia.com.

Refinance or Modify While It Is Still Possible!

Interest rates have been very low for several years, and right now they are lower than ever, yet millions of mortgage borrowers who could profit from a refinance haven’t.
Similarly, millions of borrowers who are having trouble making their mortgage payments but want to remain in their homes could have their mortgages modified to make the payment affordable but haven’t.
The reasons in both cases probably include apathy, resignation and ignorance, but this article is about ignorance only. Many borrowers are even hazy about the difference between a refinance and a modification.
Refinance vs. modification
In a refinance, you take out a new mortgage, either from your current lender or from a different one, and use the proceeds to pay off your existing mortgage. In a modification, the terms of your current mortgage are changed by your existing servicer, usually for the purpose of reducing the payment.
Most often this involves an interest-rate reduction, but it may also include a term extension and, in some cases, the loan balance may be reduced.
A refinance is a market-based transaction entered into by a lender who wants the new loan. A modification is an administrative measure designed to prevent the costs of a foreclosure. In both cases, however, the borrower must document an ability to make the new payment.
Refinance profitably if you can
In general, borrowers should refinance if a profitable refinance option is available to them. A refinancing will not drop a borrower’s credit score, while a modification will. Refinancing borrowers can deal with their existing lenders but are free to shop alternatives.
A modification is a lot more complicated, takes a lot more time, and borrowers are wholly dependent on their existing servicers, which means that they have no bargaining power.
Qualifying for a refinance vs. qualifying for a modification
Declining home values have severely restricted the ability of many borrowers to refinance by eroding the equity in their homes. (Equity is property value less the mortgage balances.) With an important exception noted below, borrowers who have negative equity cannot qualify.
Borrowers with equity of 3 percent to 20 percent can qualify if they purchase mortgage insurance, which in some but not all cases will eliminate the profit from the refinance.
Borrowers with equity of 20 percent or more are best positioned to refinance profitably. In contrast, insufficient or negative equity will not bar a modification.
A low credit score will also prevent a refinance, but not a modification. Because lenders have become extremely risk-averse in the post-crisis market, credit scores have increased in importance and are related to equity.
On a Federal Housing Administration (FHA) mortgage, for example, the minimum score is usually 620, but a 620 score may require equity of 15 percent. If the borrower’s equity is the minimum of 3 percent, the required credit score is likely to be 660.
Borrowers who have suffered income declines to the point where the ratio of housing expense to income is viewed as excessively high will have their refinance applications rejected. However, an income decline of this magnitude will not necessarily prevent a loan modification.
On the contrary, an income decline that weakens the ability of the borrower to continue current payments but still enables the borrower to afford lower payments is the major problem loan modifications are designed to meet.
Borrowers can check on whether they qualify for a refinance using the new qualification calculator on my website.
The HARP exception
The earlier statement that borrowers with negative equity cannot refinance has a major exception: If their loan is owned by Fannie Mae or Freddie Mac, they are eligible for refinancing under the Home Affordable Refinance Program (HARP). This program was recently extended and liberalized.
The previous negative equity ceiling of 25 percent was eliminated for fixed-rate mortgages; fees were reduced; the requirement for a new appraisal was eliminated in some cases; and incentives were provided to the lenders servicing the loans to refinance them.
Qualifying for a modification
Determining whether a borrower is eligible for a modification is a complicated exercise on which the rules are anything but clear. The government-supported program, which differs from the strictly private programs, requires that the borrower’s income be large enough to afford a reduced payment but it cannot exceed 3.23 times the current mortgage payment. Further, the borrower cannot have “sufficient liquid assets” to make the payments, whatever that means.
In addition, the owner of the loan must be better off with the modification than without it, which is determined by a complicated algorithm that is available to servicers but not to borrowers or to me. The servicer has the final say.
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