The complicated process of selling your home for less than you owe on the mortgage, commonly known as a "short sale," is due to get a bit simpler for some people. New rules, part of the U.S. Treasury's Home Affordable Foreclosure Alternatives (http://www.makinghomeaffordable.gov/programs/exit-gracefully/Pages/hafa.aspx) (HAFA) program, go into effect November 1 for underwater mortgage loans guaranteed by Fannie Mae or Freddie Mac (about 60 percent of U.S. mortgages). The HAFA rules are designed to speed up the short sale process and encourage buyers to look at properties offered for short sales.
A short sale, also known as a pre-foreclosure sale, most commonly occurs when the value of a house has decreased and the homeowner owes more than the property is now worth. In a short sale, the lender agrees to accept the proceeds from the sale even if it doesn't cover the current debt. In the past, the only way a lender would agree to a short sale, in general, is if the homeowner has defaulted and stopped paying on the mortgage. Under the new rules, sellers can by current on their payments and possibly still qualify.
Short Sales and Timelines
One of the biggest problems with short sales is that it can be an uncertain process, with time frames that vary greatly among lenders. The sale can only be completed with the agreement of the mortgage holder. Lenders, most commonly mortgage companies and banks, might take months to decide whether or not to accept an offer from a potential buyer. This discourages many buyers in the market for a house from looking at properties in short sale; if you need to purchase a house and move in right away, you don't have months to wait while the lender ponders your offer.
The changes that go into effect November 1st mean that the lender has to decide up front the minimum amount it is willing to accept as payment for the property. HAFA also sets deadlines that both the lender and homeowner have to meet, to speed up the process. As an incentive for sellers, if the property is left in good shape the seller can receive $3,000 in moving expenses.
The New Rules
If you find yourself underwater on your mortgage and considering a short sale, you need to familiarize yourself with HAFA. Not everyone will qualify under the new rules, but now Fannie Mae and Freddie Mac can approve you for a short sale, whether or not you are current on your mortgage payments, if you meet certain conditions.
You can automatically qualify if you can document certain specified hardships:
- Death of a borrower or co-borrower
- Divorce or legal separation
- Illness or disability
- Need to move more than 50 miles for a new job
If you qualify under any of those circumstances, you'll automatically be approved. Borrowers who are current on their payments but who have lost their job may also qualify, but will need to be approved by Freddie Mac or Fannie Mae prior to approval of the short sale.
Short sales will be expedited for borrowers at least 90 days behind on their mortgage with a credit score below 620; these homeowners will not have to document financial hardship or get approval directly from Fannie or Freddie.
What Homeowners Need to Know
HAFA is designed as an alternative to the Home Affordable Modification Program (http://www.google.com/url?q=http%3A%2F%2Fwww.makinghomeaffordable.gov%2Fprograms%2Flower-payments%2FPages%2Fhamp.aspx&sa=D&sntz=1&usg=AFQjCNHAw_G9Mtt1p5N4Dq2JPpgwOpga-w) (HAMP), another Treasury program with the goal of keeping homeowners in their homes and out of foreclosure. According to the Making Home Affordable website, you may be eligible for the HAFA short sale program if the following apply:
- You have a documented financial hardship.
- You have not purchased a new house in the past 12 months.
- Your first mortgage is less than $729,750.
- You got your mortgage on or before January 1, 2009.
- You have not been convicted of any felonies in connection with a mortgage or real estate transaction.
Additionally, you may need to show that you qualify for HAMP but either were not offered or did not accept a loan modification, you fell behind or missed payments on a loan modification, or cannot stay in your current house for reasons of hardship or moving for a new job.
However, if you have a home equity loan or line of credit, that lender has the power to block a short sale; under HAFA, equity lenders may get some of the proceeds of the sale, but not much. Second mortgage holders and mortgage insurers also have the power to block a short sale.
The Short Sale Process
If you qualify for HAFA and request a short sale you'll receive a "short sale agreement" document from your mortgage holder. You'll have two weeks to respond, stating your intention to sell the house. After responding, you have four months to sell.
The next step is to hire a real estate agent to sell your home. You'll want to find someone with short sale experience, who is familiar with the HAFA program. HAFA has housing counselors who may be able to help you with the process of choosing an agent.
While your house is for sale, you should continue to make mortgage payments, which will be reduced under HAFA to a maximum of 31 percent of your monthly income. The lender, meanwhile, will decide on a "minimum acceptable net proceed," meaning the smallest amount of money the company is willing to accept in payment of the mortgage.
The smallest amount the lender is willing to accept is affected by several factors, including:
- How much the borrower owes on the first mortgage
- How much the borrower owes on the second (if any) mortgage
- The amount of unpaid interest
- Closing costs and other related expense
- The real estate agent's commission
HAFA rules require the lender to establish the minimum net proceed, but there's no guarantee your lender will tell you what it is. The rules don't specify that the lender must share this amount with the borrower.
Once You Find a Buyer
If you find a buyer for your house within the four month deadline, you and the buyer, or your agents, will send the lender a document called the "Request for Approval of Short Sale" (RASS). The lender is now required to respond to the RASS within 10 days. If the buyer's offer meets the already-established minimum acceptable net proceeds, the lender is required to accept the offer.
After the buyer closes on the property, provided you left it in good shape, you as the seller are entitled to a "relocation incentive" of $3,000. It's probably not enough to pay for your entire move, but it's enough that HAFA hopes it will prod sellers into complying with the established timeline.
Other Advantages to HAFA
Along with the relocation incentive, there are other advantages to participating in the HAFA program if you qualify:
- Free advice from HUD-approved housing counselors and real estate pros.
- Mortgage company determines acceptable sale price in advance, and agrees not to come after you for the difference.
? Less negative effect on your credit score than a conventional short sale.