I hear agents at my training and seminars sessions all the time telling me that they get so close to a short sale approval and suddenly it is declined, because the seller got a no doc loan and they have no idea why. Well let me tell you why:
A no documentation loan is one of many red flags a lender checks on before giving a short sale approval. Unfortunately, they may not check on this until after you have gotten all the work done, and BPO’s have been completed and are very close to an approval. When a borrower obtains a no doc loan they are supposed to be completely honest on the amount of money they make, employment etc… The fact of the matter is that a lot of borrowers “inflated” their income because they wanted to be lent more money to purchase the home of their dreams, and they were given an easy opportunity to do so. Banks did not verify income, and in some cases did not even verify employment.
As a result of this, if you come across a client who needs to perform a short sale, the first question you need to ask them is if the amount of income they put on their mortgage application is the same amount that was on that tax return. I go as far as to ask them if they have a copy of that mortgage application. Pay close attention-if they are hesitant, it’s possible that they’re not being completely honest with you. This can really ruin your chances of a successful outcome.
How does this affect a short sale?
When there is a no doc borrower who requests a short sale, the bank at some point will audit their application, and then request tax returns from that timeline to see if they match up. If they do not, the borrower is automatically denied the short sale and can be sued for mortgage fraud. It’s really funny how the bank can consistently lose your short sale package, have horrible turnaround time with short sales, but magically always be on their toes when it comes to a no doc loan. Short sales aren’t as complicated as most people would make them seem (if you have the proper training), but they surely are a far cry from easy. That is why making it easier on yourself at the very beginning can save you a lot of headache later in the transaction. Identifying potential red flags like a no doc loan can save you the trouble before it starts!!!