New rules make short sale approval easier

Struggling homeowners who owe more on a government-backed mortgage than their home is worth caught a break this week.

The Federal Housing Finance Agency, which regulates the two mortgage giants that back a majority of U.S. home loans, announced new rules that take effect Nov. 1 aimed at making it easier to complete a short sale -- even if you're current on your mortgage payments.

In a short sale, your lender allows you to sell the home for less than you owe on the mortgage. It is a way to avoid foreclosure.

Here are the changes:

Fannie Mae and Freddie Mac -- the two government-owned firms involved in these changes -- will allow mortgage servicers to speed up the short sale process if you’re behind on your mortgage payments, have a credit score below 620 and experience one of several financial hardships. In the past, these borrowers would have had to submit extensive documentation to prove hardship. The new rules reduce or, in some cases, eliminate the need for documentary proof.

The new rules limit to $6,000 the amount paid to holders of second mortgages, such as home-equity loans. That payment is supposed to keep companies that hold second liens – who often slow the process by negotiating higher payments -- from holding up short sales, FHFA officials said. However, The Wall Street Journal reported that second-mortgage holders would still be able to reject a sale.

Military service members who get transferred automatically will be eligible for short sales and won’t have to make up any shortfall between the home sale price and what they owe.

And perhaps most significantly, borrowers who are current on their mortgages, but who have experienced a life change or financial hardship will have their short sale expedited.

Among the financial challenges that qualify as hardships: death of a borrower or co-borrower, divorce, disability, moving more than 50 miles to take a job, increased housing expenses, disaster (natural or man-made) or business failure.

Short sales make it possible for many homeowners to walk away without having to pay the difference between what their home sells for and what they owe.

But having one of those life events happen to you isn’t enough by itself to get Fannie Mae or Freddie Mac to forgive the difference.

If you have the assets to cover the loss, you’re going to have to pay something or risk having your lender ask the court to issue what’s called a "deficiency judgment" against you, FHFA said. A deficiency judgment gives the lender the right to collect the difference between what you owed on the mortgage and the amount your home sale nets.