Short sales have become more appealing to homeowners who are behind on their mortgage and are looking to get out without going into foreclosure. But the time it takes to process these type of sales, the sales have been thought of as long rather than short. A new federal program goes into effect APRIL 5, 2010 and will provide more guidelines to allow the stressed homeowners to enter into a short sale and more quickly get on their way to a more affordable living arrangement.
It is called The Home Affordable Foreclosure Alternatives program which will provide certain incentives to lenders, and to home owners who chose to do a short sale, rather than wait until the bank takes the property.
The program is part of the Home Affordable Modification Program, or HAMP which was implemented in February 2009 to modify homeowners’ loans to avoid foreclosure. Both programs are funded through $50 billion from the bank bailout. The government wanted to basically create a streamlined process as an alternative to the foreclosures going on right now.
Due to the high volume of offers made on short sales, banks can take months to respond. Discouraged buyers will often back out of or cancel the offer.
Timelines have been put into place through the new program in order to speed up the short sale process.
The short sale transaction must be completed within 120 days. The time can be extended up to 12 months if necessary.
Short sales take up to six to nine months to get approved. It’s getting reduced to 10 days, so a bank will have to give a response to a buyer’s offer within 10 days.
It may not be an approval, it may be a rejection or it may be a counter offer, but there will be an answer. Through HAFA, lenders will be required to give the homeowner preapproved short sale terms before going to market. This will include a listing price and an amount of sale proceeds the lender is will to accept.
What this new program is doing is streamlining the process and allowing for all banks to have consistent forms and a consistent number of items that can be requested.
With a short sale, a buyer will make an offer and the lender will have to review it and respond
Banks are not required to participate, but most banks will likely participate.
Homeowners can receive up to $3,000 to pay for moving costs after the sale is completed. It’s the government’s way of offering a little bit of help, to pay for rent of a U-Haul truck, or help with first month’s rent payments.
In addition, the servicer, which the organization responsible for collecting monthly loan payments, will receive up to $1,500 per short sale to cover administrative fees.
The program only applies to homeowners with one mortgage.
Many people in Southern California took out second mortgages on their homes either because they needed the money or wanted to make large purchases .
The program will not be automatic. Homeowners have to call their lender to request a short sale through HAFA.
Why Short Sale?
Entering into a short sale agreement provides more benefits to homeowners than foreclosure, on which the HAFA program is attempting to capitalize.
Many borrowers want to know:
“How does this impact their credit good and bad? They want to know will this satisfy my lender for any further action against them. They want to know what are the tax ramifications surrounding short sales and foreclosure. And they want to know, believe it or not, this is very important, they want to know `when will I be able to buy again?’ ”
Upon the closing of a short sale through the HAFA program, the homeowner will be released from all liability for the debt of the first mortgage.
However that does not necessarily protect them from the tax ramifications, Sorensen said.
The benefits of HAFA is that it requires the lender to disclose this fact that by cooperating in pre-foreclosure or a short sale may have tax implications.
Through HAFA lenders are required to divulge all information relating to tax consequences and credit score impact to the homeowners considering a short sale.
It is now being required that lenders disclose that there are serious tax implications when one cooperates in a short sale or losing their home to foreclosure. That now must be disclosed in writing for the first time ever. It will also affect the borrower’s FICO score. However, a short sale will not lower the FICO score as much as a foreclosure will.
The homeowner will take a hit to their credit score, but not as much as with a foreclosure, Starks said.
The HAFA program is expected to alleviate the burden of foreclosures on homeowners hoping to enter a regular home sale.
It puts homeowners back into the community generating taxes again instead of another boarded up house. Every house that’s boarded up and foreclosed upon drops other home values up to $9,000 for each foreclosure.
On average, a bank will lose up to 40 percent on a foreclosed loan, but up to 19 percent on a short sale.
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