For many struggling homeowners who owe more than their home is currently worth and would like to make a strategic exit before the home goes into foreclosure, a short sale would be the ideal solution.  Unfortunately, getting approval for a short sale from their loan servicer has often been just one more struggle for beleaguered homeowners to have to
deal with.  Fortunately, a new, more uniform process could help facilitate short sales for many distressed home sellers and hopeful potential homebuyers. 

In a short sale, a lender agrees to take less than the full amount owed on the property.  In that case, an owner receives no equity from the sale, but does avoid the more damaging credit consequences of foreclosure.  If the amount from an anticipated sale will not cover the mortgage balance plus closing costs and the seller is unable to make up the difference, a short sale is needed. 

For a purchaser, a short sale property can be a great buy, because they are usually in better condition than foreclosed properties offered at comparable prices, and, so, can frequently constitute a bargain.  However, homeowners seeking approval of a short sale and the purchasers seeking to buy them have often been thwarted by balky lenders.  Early on, lenders were slow to institute processes to deal with short sale requests and too often have been resistent to fair offers even against their own interest, since foreclosure isusually a more costly alternative. 

Now, though, the federal government is requiring that a more uniform process be followed by those mortgage servicers who are participating in the Home Affordable Modification Program.  These include some of the biggest servicers in the country, including Bank of America, CitiMortgage, J.P. Morgan Chase, Wachovia and Wells Fargo.  The new initiative is the Home Affordable Foreclosure Alternatives Program.  Under HAFA, homeowners can get preapproval of the terms for a short sale, including what the servicer considers to be the minimum acceptable net proceeds. 

Previously, home sellers would have to list the home, hope for an offer, then forward it to the servicer and wait (and wait and wait) for their approval or a communication stating how the terms of the offer would have to be modified.  Many buyers would just lose patience with the delay or refuse to accept the servicer’s demands for changes to their offer.  This would often result in a lose, lose, lose for all parties involved.  The new process, which establishes a series of timetables and rules for short sales, currently applies only to homeowners who seek help through the Home Affordable Mortgage Program. 

However, servicers are finally realizing how useful short sales can be, and have been giving their in-house short sale mechanisms more attention.  We hope the new process will become a model.  Several categories of HAMP-eligible borrowers should soon be receiving notification from their servicers of the availability of the new program.  A borrower will then have 14 days (calendar days, not business days) to sign the short sale agreement and send it back.  This is crucial to understand; if you get a communication from your servicer that you are eligible, you need to respond without delay!  Once the agreement is signed, the borrower will have an initial period of 120 days to sell the house, although that can be extended for up to twelve months. 

Once a purchase offer is received, the borrower or the real estate agent must submit a request for approval to the servicer servicer, with a host of documentation, required.  This is where having your Realtor working for you comes in handy!  Once the servicer receives the request and supporting documents, they will have ten days to either approve or deny it.  The servicer may require the closing to take place within a reasonable period after approval, but not sooner than 45 days from the date of the sales contract unless the borrower agrees. 

Also important, is that the investor who owns the loan must agree to neither seek a deficiency judgment against the borrower nor require a promissory note for any deficiency.  Some investors have slapped sellers with deficiency judgments for the difference between what was received from the sale and the mortgage balance, adding more pain to sellers who have just suffered the loss of their home.  What if a seller has other assets or strong income, but simply doesn’t want to cover the shortage from sources outside of the transaction?  Don’t expect to get approval of a short sale in that case. 

There is an important tax issue to understand in connection with a short sale.  The rule had been that any mortgage debt discharged (forgiven) by a lender was considered taxable income.  However, the Mortgage Forgiveness Debt Relief Act provides a temporary rule for discharges that occur through 2012 on debt on a residence.  The special rule applies to discharges on up to $2 million in indebtedness, so long as the debt was incurred in the acquisition, construction or substantial improvement of a principal residence.

BJ Matson
Montgomery County, MD | REMAX Town Center
240-281-6732 direct, bj@choicerealestate.net
301-540-2232 (o)