As the foreclosure crisis continues to deepen across the United States, there are several options available to distressed homeowners including short sales. The Home Affordable Modification Program (HAMP) has been in effect during 2009, but very few homeowners have been able to qualify for this program to restructure their loan. Realizing this, the U.S. Treasury launched the Home Affordable Foreclosure Alternative (HAFA), making the short sale process a much more viable way to avoid foreclosure.
In a short sale, the mortgage holder, or Bank, agrees to take less than what is owed on the mortgage, plus releases the borrowers from any future liability for the debt. But due to the extraordinary influx of foreclosures and short sale applications to banks, the process has come to a near standstill. The HAFA regulations should streamline and simplify the process, helping to limit the amount of foreclosed properties and stabilizing neighborhood values.
HAFA applies to home owners who were eligible for HAMP, but were unable to qualify for loan modification. The HAFA program does not apply specifically to any Fannie Mae or Freddie Mac loan (which is about half of all U.S. mortgage debt), but the Treasury is working to get them on board as well, with guidelines expected soon.
So what has the Treasury done to kick start the process? First, the bank has 10 business days to respond to a fully completed short sale request. This will speed things up, but you'll need to have all your documentation in perfect order; this is a lot of paperwork and a distressed property expert can make sure it's done properly. Secondly, there are financial incentives to motivate the borrower and mortgage holders. The seller can receive $1500 in relocation expenses, primary mortgage holders can receive $1000 per short sale, and subordinate lien holders can receive up to $3000 to release their liens and the borrower from liability. That's a winner for the subordinate lien holders because they normally get nothing after a foreclosure.
The HAFA program goes into effect April 5, 2010 and expires on December 31, 2012. Many mortgage holders are already participating if they are ready meet the reporting requirements. The basics for a borrower to qualify for the plan are to have purchased before Jan 1, 2009 and the primary balance is less than $729,750 with payments on the loan greater than 31% of monthly income.
Sellers will get at least 120 days, but up to one year to sell the property as a short sale. They will also need to list the home with an experienced real estate professional. A real estate agent with a Certified Distressed Property Expert (CDPE) designation will understand how to work with the bank and navigate the intricacies of a short sale. This is not a typical real estate transaction and sellers are advised to consult with an expert.
A short sale can also work for borrowers that are not covered by the Treasury program and the normal rule for a successful short sale apply. The borrower must have a hardship letter that explains how they became financially distressed. There are many reasons that this could occur. Many mortgages made in the last 5 years were adjustable and the payments have increased enough to create a financial burden. The loss of job, business failure, illness, the death of a spouse or family member, divorce, separation, relocation, incarceration, or physical damage to the property not covered by insurance can create a real crisis for borrowers. The other requirement for a short sale is that the borrowers are insolvent, i.e., their income is less than expenses.
The good news is that short sales have less serious consequences than a foreclosure. A homeowner who successfully negotiates a short sale is eligible to purchase a home with a Fannie Mae loan in only 2 years; a foreclosed homeowner will need to wait 5 years. On any future loan application, the prospective borrower will need to answer YES to question C in Section VII regarding a foreclosure in the past 7 years; there is no such question currently for a short sale. Foreclosure will lower credit scores more than 250 points and will affect the score for over 3 years; a short sale is not reported on the credit score and only late payments will show up with scores going down as little as 50 points. The effect of a short sale on credit can be as brief as 12-18 months. For any employee with a security clearance such as the military, police, or CIA, a foreclosure will likely result in loss clearance and job termination; this is not true of a short sale. Foreclosure also has dire circumstances to current and future employment if employers routinely check credit scores.
If you have any questions regarding Greenville short sales or Greenville SC foreclosures, please contact The Cunningham Team of RE/MAX who are Certified Distressed Property Experts and have helped many homeowners to avoid foreclosure in the Greenville Real Estate Market. For information on Greenville SC homes contact The Cunningham Team.
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