Real estate short sales involve the sale of a property for less than the amount owed on the mortgage. This is accomplished through an approval process with the lender, who typically agrees to release the borrower’s remaining mortgage obligation. While short sales have been around for decades, the Home Affordable Foreclosure Alternatives (HAFA) program which went into effect on April 5 2010 has simplified the sales process. According to experts, these policies could have a significant impact on the number of short sales we see in the coming years.
The rule change reflects the high number of underwater mortgages and foreclosures in the real estate market. It provides homeowners with the opportunity to end their mortgage obligation without the trauma of foreclosure proceedings. Lenders are able to recoup some of their loan without the costs of foreclosure, which include not only legal expenses but the obligation to resell the home themselves.
The HAFA program affects short sales in three important ways. Firstly, homeowners who sell their homes under the program rules would be released from any remaining balance on their mortgage. In the past this was often a point of negotiation between borrowers and lenders. The second has to do with timing. In the past, a borrower would need to find a buyer before proposing the short sale to the lender, who could take several months to approve the sale. Now, a borrower can apply for a short sale without a buyer. If the lender approves the application, it must provide the borrower with a minimum agreeable sales price. Once a buyer at that price is found, the bank must approve the sale within ten days.
Finally, the HAFA program eliminates the veto power of second mortgage holders. In this day and age, many homeowners have two or even three mortgages outstanding on their homes, and these “second-lien” lenders could stop short sales in the past. This made sense for the lenders, as a short sale by definition implies that the borrower will not receive a sales price high enough to repay the second-lien holder. Under the HAFA program, however, the second and higher lenders have no say in the matter and recoup a maximum of $3,000 per sale. Of course, the implications of these changes are uncertain, and it will be important to monitor their effects over the next few years.
A key issue to keep in mind is that a short sale is not a free lunch. While the application process would stop any pending foreclosure proceedings, the borrower’s credit score will not go unscathed. As such, it is critical to consult with a qualified real estate broker and attorney, like those consulted for this article, when considering and executing a short sale. It’s difficult to remain unemotional when it comes to one’s home, and good advice can go a long way towards sound and reasonable decision-making.
Written by Bradford Pine
Bradford Pine Wealth Group – New York City Financial Advisors
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