What Is A Short Sale And When Do They Happen

Mark Spector RealtorA short sale {occurs} when a person’s property is sold for less than what a person presently owe on the property. If your price of the short sale is close to the market value it is feasible that your finance company may allow a short sale to occur.

Lenders may allow short sale offers or even requests for short sales whether or not a Notice of Default hasn’t been issued. Given the unparalleled and overwhelming quantity of losses which mortgage lenders have experienced mortgage failures that partly brought on the financial meltdown of 2007-2010, they are actually a lot more inclined to accept short sales than any other time. 

Lenders usually have loss mitigation departments which assess potential short sale transactions.  The vast majority of loan companies have pre-determined standards for such transactions, however they may be open to offers, and their willingness will varies.  A lender will generally figure out the amount of equity  (or lack of equity), by analyzing the most likely selling price through an  appraisal, Broker Price Opinion (BPO), or Broker Opinion of Value (BOV).

With regard to “under-water” individuals who owe more on their home loan than their house is worth and are having problems selling, the short sale provides an opportunity for them to avoid foreclosure as a result.

Individuals thinking about a short sale should know about this risk and ask every party involved in the process (Realtor, lender, third party) what can and will be done to protect against a deficiency judgment.  Seek advice from legal counsel within the state where the house is located to ascertain specific pitfalls.

CNBC  reported that a few lenders have been accused of participating in fraud during the short sale process.  The fraud entails lenders in second position demanding  kickbacks  in the form of cash payments from the home buyer or real estate professional, and that are not disclosed anywhere on closing paperwork or  HUD-1  statement.  This is in violation of  RESPA  rules, that require disclosure of such payments.

New Short Sale Rules

Home Affordability Foreclosure Alternatives (HAFA) Short Sale Rules

Help has supposedly arrived to help sellers (and Realtors®) doing short sales. The federal

government’s Home Affordable Foreclosure Alternatives (HAFA) program has established short sale rules that

are supposed to be streamlined and created incentives for borrowers and lenders to work together to avoid

foreclosure. The rules are intended to are intended to speed up the short sale process – which we all know is

desperately needed! The idea is that under HAFA, sellers will receive preapproved short sale terms from the

lender prior to putting their home on the market. This should greatly reduce the time involved as well as the

possibility of losing your buyer in the middle of the process.

There are requirements that a seller-borrower must meet in order to qualify for the HAFA program. First, in

order to be eligible, the seller must apply for a loan modification through the federal government’s Home

Affordable Modification Program (HAMP). Sellers who do not qualify for a loan modification or miss payments

during the initial loan modification period qualify for HAFA. Note that if a seller-borrower qualifies for a loan

modification and keep payments current during the initial loan modification will not qualify for the HAFA

program.

Once a seller-borrower is determined “eligible”, then the property and mortgage must meet certain

requirements:

  •  The property has to be the borrower’s principal residence.
  •  The borrower’s mortgage has to have originated before Jan. 1, 2009.
  •  The mortgage must be owned or guaranteed by Fannie Mae or Freddie Mac.
  •  The borrower has to be delinquent or default is foreseeable.
  •  The homeowner has to demonstrate hardship.
  •  The borrower’s total monthly housing payment must exceed 31 percent of the borrower’s    monthly gross income.
  •  The borrower’s unpaid principal on the mortgage cannot exceed $729,750.
  • If the seller-borrower meets is eligible and meets the above requirements, the HAFA program should be

available to the seller to hasten the short sale process.

What is the new process under HAFA?

1. Lenders 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.

2. Borrowers then must respond within 14 days to the lender’s short sale agreement.

3. When a purchase offer is made on the property, the seller-borrower must submit the purchase contract

to the lender within 3 days, along with the buyers’ mortgage preapproval and the status of negotiations

with other lien holders on the property.

4. Lenders must approve or deny the purchase contract within 10 days of submission.

All of this should take no more than 57 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. This

is a significant change from current law and will relieve much stress from current homeowners who are afraid to

get out from under their current debt load even though it is too much for them but they are worried about a

promissory note from the second lienholder if they walk away.

NOTE: The HAFA program will only be in place between April 5, 2010, and Dec. 31, 2012.

The information in this article is believed accurate as of the date of publishing. This information is not intended to be legal advice for a

specific situation but rather to provide answers to general questions. Advice in specific situations may differ depending upon a wide variety of

factors; therefore, individuals with specific issues should seek the advice of an attorney, financial advisor or other professional.

If you are thinking of buying or selling a home, condo or investment property call me Mark Spector 310-430-0633