What is a Short Sale?
A Short Sale is an alternative to foreclosure that helps borrowers keep their credit intact and reduces costs to the servicers.
A Freddie Mac Standard Short Sale (“short sale”) is the sale of the Mortgaged Premises for less than the total amount necessary to satisfy the Mortgage. (Guide Section 9208.1)
If the sale proceeds are less than the total amount due, but there is a mortgage insurance claim payment or a Borrower cash contribution that results in Freddie Mac’s receiving all sums owed on the Mortgage, then Freddie Mac considers the transaction a “make-whole” preforeclosure sale rather than a short sale.
The Servicer does not need to obtain Freddie Mac’s prior approval for a make-whole preforeclosure sale. (detailed in Guide Section 9208.8)
- A Freddie Mac Standard Short Sale ("short sale"), including the Streamlined Short Sale, that meets the requirements of Guide Sections 9208.1 through 9208.8. All other short sales must be submitted to Freddie Mac for review and approval.
Freddie Mac offers incentives for servicers to complete short sales, detailed in Guide Section 9204.6.
Servicers must take care to have in-house QC policies and review the practices of their business partners. Any party who engages in fraudulent activity in a short sale may be added to the Freddie Mac Exclusionary List, barring future involvement in Freddie Mac business, and reported to applicable regulatory authorities.
See Guide Chapter 3201 for more information on Freddie Mac requirements for fraud prevention, detection and reporting.
Short Sale Process
Guide Section 9201.2 outlines the process for determining which loss mitigation solution is appropriate for a Borrower.
When a borrower who is current or 31 days or less delinquent, requests loss mitigation assistance, the Servicer must evaluate the Borrower’s eligibility for a reinstatement or relief options (refer to Guide Chapter 9203).
If neither of these options are not appropriate, the Servicer must consider a workout option in the following sequence:
- The Servicer must first consider the Borrower for a Freddie Mac Flex Modification (per Guide Chapter 9206)
- If a Borrower is ineligible for, does not accept, or fails to complete the Trial Period Plan, the Servicer must next consider the Borrower for a Freddie Mac Standard Short Sale ("short sale") (per Guide Chapter 9208)
- If a Borrower is ineligible for a short sale or a short sale is not a viable option, the Servicer must next consider the Borrower for a Freddie Mac Standard Deed-in-Lieu of Foreclosure ("deed-in-lieu of foreclosure") in accordance with the requirements of Guide Chapter 9209
Consult Guide Section 9208.2 for a list of evaluation criteria.
- Primary residences, investment properties, or second homes.
- If a borrower is current or less than 31 days delinquent, they must occupy the mortgaged premises as their primary residence
Every Borrower, regardless of Delinquency status, is eligible to be considered for a short sale, provided the following requirements are met:
- Borrowers who do not meet the requirements for a Streamlined Short Sale must be experiencing (now or in the past) one of the eligible hardships detailed in Guide Section 9202.2(a)
- The sale must be an arm’s length transaction (defined in Guide Section 9208.7)
If the borrower is current or less than 31 days delinquent must also:
- Occupy the mortgage premises as a primary residence.
- Have a monthly debt-to-income ratio greater than 55 percent (service members with Permanent Change of Station orders are exempt from this requirement).
- At least one borrower must occupy the mortgaged premises as a primary residence.
- Borrower has not acquired a new mortgage in the six months preceding the servicer evaluation date. (Guide Section 9208.3(b) outlines exceptions).
- Borrowers who are current or less than 60 days delinquent have special circumstances outlined in Guide Section 9208.3(c).
Borrower Documentation requirements are outlined in Guide Section 9208.3(a).
After the borrower meets all the eligibility requirements for short sale the servicer will complete the following steps
- Obtain a short sale property value from Freddie Mac via the “Obtain Valuation” tab in Freddie Mac Real Estate Valuation and Pricing tool.
- Receive the necessary documents via the valuation and pricing tool with a “good through date” after the request has been submitted and estimated market value and minimum net proceeds are determined
- Provide list price guidance to borrower or real estate broker.
- Communicate a list of acceptable closing expense categories to both borrower and real estate broker detailed in Guide Section 9208.7(d)
- Use communication timelines short sales listed in Guide Section 9208.6
Selling the Property
- Property must be listed on MLS for at least five consecutive days including one weekend (i.e., Saturday and Sunday). Borrower should work with real estate professional and make sure property is in “active” status five days prior to borrower acceptance of purchase offer.
- The borrower must have one of the following mortgage situations
- The Borrower has not acquired a new Mortgage in the six months preceding the Borrower’s Delinquency
- Unless the Borrower is current, in the six months preceding the evaluation of the Borrower for a short sale.
- The Borrower is only permitted to have obtained a new Mortgage if the Borrower’s eligible hardship was distant employment transfer.
- A Borrower who is current or less than 60 days delinquent must meet the imminent default requirements as described in Guide Section 9208.3(c).
- Sales Proceeds – review the executed sales contract and Settlement/Closing Disclosure Statement. The borrower must not receive any proceeds from the sale other than relocation assistance and should reflect on the Settlement/Closing Disclosure Statement.
- Determine if the transaction meets the minimum net proceeds- Consult Guide Section 9208.7(b) for a breakdown of Allowable Closing Costs based on property location.
- Servicer is authorized to pay subordinate mortgage holders an aggregate amount of $6,000, contingent upon agreement by all mortgage holders to release their Mortgages and waive all rights to seek a deficiency judgment against the borrower.
Some borrowers may be eligible for relocation assistance.
If the borrower is not required to make a financial contribution toward the deficiency, then borrower is eligible to receive up to $3,000 in relocation assistance as long as the property was owner occupied at time of servicer evaluation.
Full details in Guide Section 9208.4(b) Closing, Reporting, and Remittance Requirements
Servicers must now complete the closing process.
- Review the Freddie Mac Standard Short Sale closing documentation, as noted in Guide Section 9208.8(a).
- Servicers must pay any expenses outside of the transaction and be reimbursed by Freddie Mac.
- Ensure that Borrower pays cash contributions at settlement
- Completed closing withing 60 days of approving the purchase offer
- Maintain short sale affidavit in the Mortgage file per Guide Section 3302.3
- Review Settlement/Closing Disclosure Statement
- Report the transaction, remit the proceeds and submit the settlement data:
- Report the Mortgage as a Short Sale via the Freddie Mac Loan Level Reporting tool by the second Business Day after the servicer receives the settlement proceeds.
- Complete the “Short Sale Settlement” screen in Workout Prospector. Servicers MUST always enter the Freddie Mac data into Workout Prospector (WP) or Resolve.
- Refer to the Workout Prospector Users’ Guide for information on how to complete the Short Sale Settlement Screen.
- Notify Freddie Mac that you have approved a make-whole preforeclosure sale by submitting the following:
- Completed and signed Form 710 Mortgage Assistance Application
- Copy of the executed sales contract
- Copy of the MI’s approval letter (if applicable and not previously delegated by the MI)
- Breakdown of the transaction to show how the sale of the property plus any other proceeds will result in a total satisfaction of debt.
- Charging off the deficiency – Charge off amount will be reflected on the Draft Report. Please review Draft Report and report any discrepancies between its records and the amount on the Report via Freddie Mac Servicing Data Corrections.
- Remit additional proceeds to Freddie Mac withing five business days of receipt
- Release the borrower from the lien if all participants have acted in good faith and compliance of all applicable law
- Request reimbursement as per Guide Chapter 9701.