FHA , VA, Convetional Short Sale Equations

In working Short Sales, there are some numbers and calculations that are especially critical and knowing how to run these calculations will ultimately save you many headaches in the long-run. For instance, the initial list price for the Listing Agreement that is submitted to the bank, the initial list price for MLS, the net amount that banks typically require in a Short Sale given the type of loan, the bottom-line offer that will be necessary to cover the bank's required net, as well as all broker commissions and Seller closing costs. In addition, you need to know how the numbers are affected if there are multiple mortgages on the property. All of these numbers are critical for you to facilitate the transaction effectively, gain credibility with the bank, and best represent your client.

Determine the Lender's Discount Threshold

Banks have a threshold at which they will accept or reject on offer in a Short Sale. And knowing these approximate discount thresholds is imperative in determining your list price for MLS, so that you are able to generate an offer that will meet the bank's requirements, as well as cover all the Seller closing costs and protect your commission. When we refer to the banks "discount threshold", we are referring to the net amount that the bank requires in the transaction after all approved closing costs and commissions have been paid in the transaction. As a reminder, when it comes time to go active on the market in MLS, you need to adjust the price in the Listing Agreement and have your client initial off on this price change.

Calculating the initial list price for MLS is a critical part of setting up the Short Sale. We all know that when considering market comparables for a specific area, if the price per square foot of your client's property is equal to or higher than any other property in the neighborhood, your chances of getting an offer quickly are pretty slim and the whole goal in a Short Sale is generating an offer quickly so that the house doesn't go to foreclosure. In many states, the foreclosure process is a very aggressive one, so knowing how to calculate your initial list price for MLS is imperative. To do this, you must know what kind of loan you are shorting and have a good idea as to what the lender's discount thresholds are for each type of loan.

Currently...

FHA loans are insured at 82% of the current market appraised value

VA loans are guaranteed at 88-91% of the current market appraised value

Currently, Conventional and Home Equity lenders expect net proceeds of no less than 85-92% of the current market appraised value.

Note: These thresholds represent a percentage of current market value, not the loan balance. Currently, the Conventional threshold is 85-92% of current market value. This threshold fluctuates with the market and is lender-specific. We have been working Short Sales for almost 5 years and FHA and VA thresholds have not changed during this time. Know that changes in market conditions, bank policy and/or the passing of legislation can effect these thresholds. If the market takes a turn for the worse and property inventory increases for lenders, you will most likely find that Conventional thresholds will decrease. As usual with any of the governmental
standardization processes I'm not holding my breath.

-Christopher Rockey