The Ultimate Guide to Real Estate Short Sale Process in Pennsylvania 2021
Even though the information on this web page is provided by a qualified industry expert, it should not be considered as legal, tax, financial or investment advice. Since every individual’s situation is unique, a qualified professional should be consulted before making financial decisions.
In this article, I will guide you through the complete short sale process you go through when completing a short sale in Pennsylvania. You will learn what it takes the homeowner to have a short sale completed and even how to get professional help for free.
As the founder and owner of a professional short sale processing company, I often consult my own clients coming to my Philadelphia office for help and asking what Pennsylvania laws require regarding short sales and how they are processed. And I’m glad to share my expertise with you as well.
Let’s start with the most basic question: what is a short sale exactly in Pennsylvania?
What Is a Short Sale in Pennsylvania?
Simply put, a short sale in Pennsylvania is when your lender allows you to sell your home for less than what the mortgage balance is, in order to avoid foreclosure.
You are not responsible to pay the difference (deficiency balance) at closing and the transaction does NOT get recorded as a foreclosure.
For example, let’s say the as-is value of your home is $110,000, but you owe the bank $150,000 on your mortgage balance. In a short sale, the lender will allow you to sell for the $110,000 that the home is worth.
The $40,000 difference is called the “deficiency balance.” The lender waives their right to collect on this money (needs to be verified on the short sale approval letter) and a foreclosure is not recorded on your credit. Sounds great, doesn’t it?
If you want to know more about why a short sale is most often a better outcome than the one of any other possible solution, I also wrote an article Short Sale vs. Foreclosure vs. Deed in Lieu (Difference, Pros and Cons) where I’m comparing the three options in detail.
How Does a Short Sale Work for a Home Seller in Pennsylvania?
Pennsylvania is a judicial state. For a home seller behind on their payments, this means the lender is required to take them to court in order to foreclose. This buys you a little extra time, but should not be taken for granted. Time is always of the essence when a PA homeowner falls behind on their mortgage payments!
For a Pennsylvania short sale home seller, you will be required to prove your hardship to the lender by submitting a mortgage assistance packet, financial hardship documentation, and a completed offer package.
The type of financial documents required for your short sale will largely depend on the type of loan product that is in default (FHA, FNMA, VA, Conventional, etc.).
8-Step Short Sale Process for Sellers in Pennsylvania
1. Consulting with a Professional Short Sale Processing Company
A professional Pennsylvania short sale processing company facilitates the entire short sale process from start-to-finish. This includes, but is not limited to, being the direct contact for the short sale lender, processing paperwork, etc.
A good PA short sale processing company will have the communication systems in place to expedite the process and shorten the lender’s timelines. In case you don’t know who short sale processors (also called negotiators) are, I wrote an entire article What Does a Short Sale Negotiator Do for the Seller?.
Interview your potential short sale processor and ask them specifics about their follow up and communication systems throughout the short sale transaction.
PA short sale processing companies have various business models, but it is highly suggested to choose one that does NOT charge the homeowner for their services and instead get compensated by the property buyer. To get connected with one, fill out this form.
2. Authorizing the Short Sale Processor to Negotiate with Your Lender on Your Behalf
The third party authorization (customer agreement) is the instrument that grants permission to the short sale processor to speak to the lender about the loan and obtain the necessary information to proceed with the short sale.
The customer agreement document varies by name and verbiage from processor to processor. The main gist is that you are entering into a written agreement with the processor and allowing them to process short sale paperwork between you and the lender.
This contract should clearly state that you are simply hiring the PA short sale company to process documentation and NOT as a debt negotiation service.
3. Initiating the Short Sale Process
Short sale initiation documentation and requirements may vary, depending on the specific file.
However, the other most common items the PA homeowner will need to submit to the processor will be the RMA, supporting financial hardship documents, and a hardship letter.
The RMA stands for Request for Mortgage Assistance package. Every lender has one of these. Although the packet itself varies from lender to lender, the overall structure is very similar.
The homeowner is required to provide information such as the type of hardship, whether the hardship they are experiencing is short or long-term, borrower income information, etc.
Along with the information provided in the RMA, the PA short sale lender will require supporting documentation. This might include a hardship letter, bank statements, paystubs, etc.
The hardship letter explains in greater detail the reasons that are prohibiting the borrower of not being able to make their mortgage payments. Common hardship reasons include loss of job, divorce, or increase in household expenses.
4. Listing the Home for Sale
Most short sale lenders will require the home to be listed on the market with a local, licensed real estate agent.
Their reasoning is simple:
When the bank approves a short sale, they are agreeing to take a loss on the property. By having the property advertised on the local MLS, they are getting as many offers on the home as possible. Therefore, hopefully lessening their overall loss on the asset.
5. Review of the Offer by Your Lender
Once the home is listed with a local, licensed real estate agent, hopefully you get one or more offers to come in. Once this happens, it is time to sign one of those offers and submit it to your short sale processor.
A good PA short sale company will have the correct systems and title company connections in place to order an owners & encumbrances search and preliminary settlement sheet to complete the offer package. Once the offer package is completed, it is submitted to the short sale lender.
The short sale facilitator then confirms receipt of the offer package with the lender, then first-level offer review begins. During this stage of the offer review process, the PA short sale lender reviews the entire offer package to ensure they have everything they need and to ask for any clarifications they may require.
6. BPO or Third Party Appraisal
Once the first-level offer review is completed, the file is moved along to second-level offer review. This is where the bank makes their decision on whether to counter or accept the offer.
In this stage, the PA short sale lender orders a third party appraisal or BPO (Broker’s Price Opinion). The results from the appraisal or BPO will determine whether or not the bank accepts or counters the buyer’s offer.
In some cases, the Pennsylvania short sale lender will accept a percentage of the appraised value. This is common in FHA and VA loans. In other circumstances, the bank will want an offer equal to the third party appraisal.
7. Acceptance or Negotiation of the Offer
Once the PA lender conducts their third party appraisal and looks over the offer, they will either accept or counter the offer.
If the lender counters the buyer’s offer, a negotiation period will ensue.
If a verbal acceptance is issued, you can expect to receive the short sale approval letter within 5-7 business days on average.
You will want to make sure the letter has verbiage in it saying that the lender is waiving their right to collect the deficiency balance on your loan. It may not say it in those exact words, but something similar should be in the document.
Congrats! The hard work is done!
As the PA short sale seller, you just sit back and hope the home inspection goes smooth.
If all is well, you should be sitting at a closing table within 30-45 business days.
How Long Does a Short Sale Take in Pennsylvania?
Average Short Sale Period in PA
This is a very common question among PA homeowners considering a short sale. The truth is, there is no accurate answer.
The timeline depends on many factors, including how cooperative the homeowner is when documentation is required to submit, how quick the home can sell on the market, how many mortgages are against the property, other liens against the home, etc.
On average, you should expect your short sale completed for around 3-5 months, if it’s processed professionally.
Short Sale Timeline for the Seller in PA
As stated above, the average period and timeline for short sales depends largely on numerous factors.
With a good PA short sale processing company, on average, here is the timeline you should expect:
- PA Short sale lender processes the third party authorization: 3-5 business days.
- The RMA and all supporting hardship documentation is submitted to the short sale lender: 1-2 weeks.
- The bank confirms receipt and begins to process the RMA package: 7-30 business days.
- The local listing agent lists the home on the market: 1-2 weeks.
- An offer is received on the property: 30-60 days.
- The complete offer package is put together by the PA short sale company.
- The lender reviews the offer: 3-10 business days, if a short sale is processed professionally. Otherwise, 30 days is the maximum period by law.
- Issuing a short sale approval to the seller: 3-5 business days.
- Settlement: 30-45 days.
What Affects the Length of a Short Sale
FHA loan types are the most extensive in terms of the length of a short sale in PA. The Pennsylvania short sale lender is going to put you through what’s called a financial waterfall.
During this process they will require you to go through the modification process, before being considered for a short sale.
So, you’ll have to submit extensive financial hardship documentation, such as bank statements, pay stubs, 4506-T tax form, tax returns, a hardship letter, etc.
PA Conventional loan products are often the most flexible when it comes to doing a short sale. The note holders are typically private companies who have their own requirements for short sales and do not have to follow some government mandated guidelines.
FNMA (Fannie Mae) short sales can take a bit longer to close than a traditional short sale, but not as long as FHA’s.
During the PA FNMA short sale process, the short sale processor must submit the offer to the loan servicer and on the Fannie Mae portal. This extra step may add some time to the completion.
1. Low Offer
Many buyers falsely believe that submitting a blind, low ball offer on a short sale can yield them a great deal. In layman’s terms, a “steal.” Unfortunately, this is not true most of the time. In fact, it usually just wastes precious time.
A buyer must be able to provide documented supporting evidence of how they came up with the offer. Common examples: as-is comps, contractor repair estimates, etc.
2. The Buyer Is Unprepared
An unprepared buyer can throw a wrench in the middle of a smooth sailing PA short sale transaction.
An unprepared buyer can come in many forms, but here are the most common: POF (proof of funds) are not readily available, LLC documentation not accessible, purchase contract filled out incorrectly, etc.
Unprofessional Short Sale Processing
An unprofessional short sale processing company should be clear to sniff out from the start.
To avoid this situation, it is important to ask the right questions in the beginning. These interviewing questions should include, but not be limited to:
- Do you charge the homeowner anything?
- Please explain your communication systems with all parties.
- Please explain your follow up systems in place to keep the lender accountable to their timelines.
If a PA homeowner is non-cooperative, it is pretty much a dead deal from the start. Homeowner cooperation is 100% needed, in order to have a shot at success.
Errors on PA short sale documentation usually occur on the mortgage assistance application. These mistakes are typically small, but add up!
More than One Loan
It is not that uncommon for a property to have two mortgages against it. In order to perform a short sale, BOTH lenders must agree to the terms. The primary mortgage holder initially approves the short sale, then makes an offer of settlement to the secondary note holder.
Most lenders will not allow a short sale until an IRS lien against a home is released or discharged. FHA mortgages are the most strict when it comes to this type of judgement.
Utility and Property Tax Bill Copies
If outstanding property tax and/or utility bills exceed a certain amount, the PA short sale lender may require copies of the payoffs or bills. This is so they can verify that the figures they are being asked to pay are accurate.
How to Get Free Professional Short Sale Processing Help
If you have read till this section, you have already understood that with all intricacies involved, doing a “short sale by owner” will take months longer than if you get professional help.
In the worst case, the lender can just foreclose during the short sale negotiations, if they are conducted unprofessionally. The same is true when entrusting a real estate agent with processing your short sale just because they said that they have processed a few in the past.
Fortunately, you can find a professional and competent short sale processor who will do the job completely for free for you (as they will get paid by the buyer).
If you think my article does show that I’ve spent years helping Pennsylvania homeowners process short sales as my main business, you are welcome to fill out this form to connect with me. I will get back to you, we’ll talk about your situation, and then have your property short sold in the shortest possible time, with minimum hassle for you.