There's a certain word beginning with F that nobody wants to hear these days - foreclosure, or lender repossession of a property on which the mortgage hasn't been paid. It's costly and time-consuming for lenders, humiliating and financially devastating for borrowers.
One way to avoid it is to try for the somewhat less-offensive S-word - a short sale, or a sale in which a property is sold for less than what's owed on the mortgage. This month, short sales are on the path to becoming a little more attractive and easier to accomplish, thanks to the federal Treasury Department's Home Affordable Foreclosure Alternatives Program.
The program offers financial incentives to both the borrower and the mortgage servicer - that's either the lender or a company hired by the lender to collect the payments and handle the accounting for your loan - in exchange for averting a foreclosure. The program also provides preapproved terms for a short sale. The servicer accepts the partial payment in full satisfaction of the loan. You can search a list of participating mortgage servicers at making homeaffordable.gov.
"I don't know if HAFA is the greatest thing that ever happened, but it's a good thing," says Phil Tesoriero of Exceptional Homes Real Estate in Farmingdale, who created the short sale certification course taught by the Long Island Board of Realtors. The introduction of the program has prompted lenders to begin circulating their own short sale policies - even those that aren't participating in the program, he says.
"Short sales were basically the Wild West before - banks did whatever they wanted to do. I'm not sure those days are done, but we're coming a long way," Tesoriero says.
The National Association of Realtors reports that the number of short sale requests is on the rise, and not all servicers are equipped to handle the demand. In the absence of uniform procedures, members have reported difficulties with unresponsive lenders, lost documents and processing delays.
If you're in financial trouble and your mortgage is under water - or you owe more than your home is worth - here are six things you should know about short sales and the new federal program.
1. Where do I start?
If you've missed mortgage payments, or anticipate missing them in the near future, your first step should be a call to a HUD-approved counseling agency (to search for one, visit the HUD website at hud.gov/offices/hsg/sfh/hcc/fc). "We go over their budget, we go over their income, review the situation and try to see what we can do. If we can intervene with the bank on their behalf, that's what we do," says Carol Yopp, program director at the nonprofit HUD-approved Long Island Housing Partnership, which provides free counseling.
If a short sale is deemed the best course of action, get legal advice from an attorney with short sale experience before doing anything else, Yopp says. (See resource list for more information.) A licensed real estate broker can help list and sell your home. Look for one with the "SFR" certification, which indicates completion of the training course in short sales and foreclosures offered by the National Association of Realtors. Commissions and fees are paid out of the sale proceeds, Tesoriero says.
2. I have a buyer already. How do I request a short sale?
If you've already listed your home on the market and you receive an offer that's less than what you owe, but more or less in line with market value, you can submit the offer with a short sale package to the mortgage servicer. A broker or attorney can help you assemble and submit the package according to the servicer's requirements and make the most convincing case for a short sale. Remember, from the lender's perspective, the goal of a short sale is to mitigate the lender's losses - not yours. Being under water is typically not a good enough reason; lenders don't want to take less than the full payment unless your package also demonstrates a financial hardship that makes a partial payment look more attractive than the alternatives.
3. Am I eligible for the new federal program's short sale option?
Eligibility for Home Affordable Modification Program (HAMP) is a prerequisite for the program: The property has to be your primary residence, the loan must have originated before 2009 and the unpaid principle balance for a single unit has to be no more than $729,750. Your monthly mortgage payment has to total more than 31 percent of your gross monthly income, and you have to prove that you can't afford it due to financial hardship.
You'll be considered for a short sale after you've tried unsuccessfully to complete a loan modification under HAMP, or if you're HAMP-eligible and request a short sale. If you qualify, you'll be notified by mail within 30 days, and you'll have two weeks to respond.
4. What are my responsibilities?
If you sign a HAFA short sale agreement, there will be a pre-sale assessment in which the lender determines the home's list price, or the minimum amount it will accept after sales costs. It's your job to list and sell the home at the approved price in an "arm's length" transaction - meaning you have no relationship to the buyer. You'll have to maintain its condition and be cooperative about showing it.
The servicer has the right to expect partial payments - up to 31 percent of your monthly income - while it's on the market. You'll also have to be able to provide the buyer with a clear title, which means negotiating with the lien holders to clear any additional judgments or liens secured by the house, such as a second mortgage or a home equity line of credit.
5. What are the perks?
If you follow the procedure precisely and submit a fully executed sales contract at the approved price, along with all required documents, the turnaround time for a short sale approval or denial is only 10 days. The mortgage servicer receives financial incentives from the federal government to allow a portion of the gross sale proceeds to be paid to help clear subordinate liens.
And once the short sale closes, you'll have no further responsibility for repaying the mortgage - this would not necessarily be true for short sales conducted outside of the HAFA program. You also will receive $3,000 toward relocation expenses. These benefits have to be reported to the IRS - both the debt forgiveness and the relocation check may be considered taxable income.
6. What's the fallout of a short sale?
No matter what you may have heard to the contrary, your credit score will suffer. In fact, if you've missed payments on the mortgage or other bills, a fair portion of the damage was done before you ever got to the point of pursuing a short sale. The term "short sale" does not appear on the report - that's merely the phrase used to describe the deal you negotiate with the lender - but the status for the account will show that it was settled for less than what was owed.
There's no way to generalize the negative impact of a short sale on a credit score, since each situation is different. The only thing that's true across the board is how long it remains on the report - seven years.
Need help with a short sale?
The Nassau County Bar Association (nassaubar.org)
Volunteer attorneys will answer mortgage and foreclosure questions at free clinics from 3 to 6 p.m. May 10 and June 15. Call 516-747-4070 for reservations.
Homeowner's HOPE Hotline
The 24-hour hotline offers free HUD-certified counseling services in English and Spanish. Other languages are available by appointment. Call 888-995-4673.
National Association of Realtors
Download HAFA guidelines and forms at realtor.org/government_affairs/short_sales_hafa.
Touro Law Center
Law students, under the guidance of a law school faculty member, assist homeowners for free with legal filings and negotiations in the Mortgage Foreclosure & Bankruptcy Clinic. Call 631-761-7000 for more information.
Long Island Housing Partnership
Free HUD counseling sessions are available by appointment. Call 631-435-4710.
Annual Credit Report Request Service
Federal law gives you the right to get a free copy of your credit reports from each of the three national consumer reporting companies once every 12 months. Visit annualcreditreport.com or call 877-322-8228. You also have the right to see your credit score. For that, they can charge a fee of about $8; the price may include information on how to improve your score.