New Short Sale Requirements

Despite the efforts of the Obama administration in helping distressed homeowners, there are still a lot of individuals and families who found themselves with underwater mortgages and also rejected when they applied for loan modification. The federal government finally decided to extend the Home Affordable Foreclosure Alternative or HAFA program to include incentives to lenders if they approve more short sale transactions.

The problem is ever since the program was launched late last year, only 661 short sales were approved. The Treasury has already spent $4.3 million for the incentives and the outcome was rather disappointing. In order to address such underperformance, the statedepartment decided to amend some of the program’s rules.

For starters, servicers are no longer required to verify the financial status of the borrower and determine if they have a debt-to-income ratio of above 31 percent as compared to their mortgage dues. The programs also no longer requires secondary creditors to agree to be paid 6 percent of the principal amount owed them, as much as $6000. Lastly, lenders are required to respond to the short sale application within 1 month or 30 days.

Among these changes, the last one will certainly be welcomed by a lot of distressed borrowers especially those who were truly qualified but had time against their side. Some lenders might also have trouble meeting this new rule especially if they do not have the manpower to review all the short sale applications submitted to them . On the other hand, the non-verification of the homeowner’s finances, particularly the “hardship” part opens up the program to fraud or scams.

Obviously, the changes made by the Treasury Department are excellent news especially if you consider the 11 million homeowners who are currently underwater or owe more in mortgage versus the value of their home. For certain, many borrowers will become hopeful they could avoid a foreclosure with ashort sale.