WHAT IS A “SHORT SALE”?
A "short sale" occurs when a lender "discounts" the balance due on a homeowner's mortgage if he is in financial trouble, if they so choose. The purpose, of course, is so the homeowner can find a buyer quickly, before foreclosure becomes necessary.
Foreclosure is an expensive and time-consuming process that some lenders may want to avoid. But in most instances, lenders would rather foreclose, and then sell at nearly market value. Why take a discount if they can get full value? So, in most cases, a short sale is simply not going to happen.
New short-sale rules may help sellers
The streamlined rules are intended to help borrowers avoid foreclosure.
Homeowners struggling to sell their homes in a SHORT SALE are getting some relief, thanks to the federal government's Home Affordable Foreclosure Alternatives (HAFA) program.
Up to now, many short sales in which the lender accepts a sale of the property for less than the full amount owed have taken months to complete. Sometimes, the complex and lengthy process has failed, resulting in foreclosure. HAFA establishes streamlined short-sale rules and provides incentives for borrowers and lenders to work together to avoid foreclosure. The rules in effect between April 5, 2010, and Dec. 31, 2012 also are intended to speed up the short-sale process.
Under HAFA, borrowers receive pre-approved short-sale terms from the lender before putting the home on the market.
Eligibility requirements:
The HAFA guidelines apply to lenders that voluntarily participate in the HOME AFFORDABLE MODIFICATION PROGRAM (HAMP). The DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT says that more than 100 servicers have signed up to participate in HAMP, covering more than 89% of mortgage debt outstanding in the country.
To be eligible for HAFA, homeowners must first apply for a LOAN MODIFICATION through HAMP. Owners who do not qualify for a loan modification or miss payments during the initial loan-modification period qualify for HAFA.
Other HAFA requirements include:
- Property is principal residence.
- Mortgage originated before Jan. 1, 2009.
- Mortgage is owned or guaranteed by Fannie Mae or Freddie Mac.
- Borrower is delinquent or default is foreseeable.
- Homeowner demonstrates hardship.
- Borrower's total monthly housing payment exceeds 31% of gross income.
- Unpaid principal does not exceed $729,750.
According to HAFA rules, lenders now must offer a short sale in writing to the borrower within 30 days if the borrower does not qualify for or complete a loan modification. Borrowers then must respond within 14 days to the lender's short-sale agreement.
When a purchase offer is made, borrowers must submit the sales contract to the lender within three days, along with the buyers' mortgage pre-approval and the status of negotiations with other lien holders on the seller's property.
Finally, lenders must approve or deny the contract within 10 days.
HAFA rules also state that lenders must release borrowers from the obligation to repay the difference between the sales price and the loan amount. No deficiency judgments are allowed for a first or second loan.
Other HAFA financial incentives include $1,000 to loan servicers to cover administrative fees, up to $1,000 for mortgage investors who agree to share short-sale proceeds with second lien holders and $1,500 to the homeowners for relocation.
How do a foreclosure and a short sale show up on the homeowner’s credit?
Foreclosures show up as FORECLOSURE, and stay on your record for seven years. Anytime the homeowner applies for a new loan or has their credit run, the foreclosure will show up. Many times employers ask if the homeowner has been foreclosed upon when interview for a job.
A short sale is listed as SETTLED DEBT, and is much less harmful to the homeowner’s credit. Please consult a credit company for more information.