The concept of a short sale is simple enough. However, the actual process can be involved, slow-moving and frustrating. This is especially true for people uninformed about state laws on deficiency judgments and their lender’s policy or process for accepting short sale offers. A short sale is when the net proceeds of a home sale are less than the amount needed to pay off existing liens against the property. For a short sale to work, all lien holders must agree to accept less than what they are owed. This may include banks, home owner’s associations, contractors, and the IRS.
Home Affordable Foreclosure Alternatives Program (HAFA)
Congress recently extended the Mortgage Forgiveness Act and HAFA short sale program. The deadline for a HAFA application is now December 30, 2016. Not everyone qualifies for HAFA and borrowers should discuss their situation with a real estate attorney. Borrowers who obtained their mortgage on or before January 1st of 2009 who are struggling to pay their mortgage due to a qualifying hardship may be eligible. The property must not be condemned. Borrowers who do not qualify for HAFA should ask their mortgage company about other possible options. The following are benefits of HAFA:
- If the short sale is not successful, borrowers may be able to transfer title to their lender by deed-in-lieu of foreclosure (DIL).
- The HAFA short sale or DIL includes a waiver that releases the borrower from the debt left unpaid on the mortgage.
- There is up to $10,000 in relocation assistance available to qualifying borrowers under HAFA.
- For many borrowers, HAFA provides an opportunity for quicker financial recovery because it has less of a negative effect on their credit report.
Be prepared for delays
Most home sales take less than 45 days to close after a contract is executed. Short sales take up to 120 days to close and may go even longer. To approve a short sale, banks require paperwork from the borrowers, including an explanation and financial documents showing why they can no longer make payments. Lenders often try to get buyers to pay things that are usually seller costs. Sometimes lenders will sell the loan servicing rights to another company after they have agreed to short sale terms. An attorney can help home sellers deal with bureaucracy and possible conflicts of interest by lenders. When done properly, a short sale can benefit all parties.