What You Can Do to Mitigate Fallout from a Short Sale

by 28 Nov 2012

The Federal Housing Finance Agency (FHFA) regulates Fannie Mae and Freddie Mac, two government-owned organizations backing most home loans in the United States. It has announced that new regulations will become effective on November 1, and the goal is to simplify the process of making a short sale. When such a transaction takes place, the mortgagee allows the borrower to sell their home for less than they owe on their mortgage as a way of avoiding foreclosure.

Both Fannie Mae and Freddie Mac will let mortgage providers shorten the short-sale process if borrowers are behind in making their mortgage payments, experience a specified financial hardship and have a credit score lower than 620. Previously, mortgagees in this situation had to provide extensive documentation to verify that their financial hardship was genuine. With these new regulations, the need for such documentation is reduced or eliminated, based on the borrower’s circumstances.

Included in the financial problems that are considered to be hardships are business failure, disability, divorce, moving a distance of 50 miles because of employment, a natural or man-made disaster, an increase in housing costs and the death of the borrower. Facing a short sale is stressful on your personal financial situation. Don’t shred all your cards if you are considering short selling your home. Keep in mind that credit cards really are safer than cash and with options like Green Dot Cards, you have the ability to rebuild your credit score.

Under the new regulations, the amount paid to those who hold second mortgages, including home equity loans is limited to $6,000. This is intended keep companies that are holding second liens, who often negotiate higher payments and hinder the process, from causing delays in short sales, according to FHA officials. At the same time, the Wall Street Journal noted that a second-mortgage holder still has the power to reject a sale.

Anyone serving in the military who is transferred, will become eligible for a short sale at that time and will not have to pay the difference between the sale price of their home and the amount they owe on their mortgage. In addition, the short sale will be expedited for borrowers who are up to date in making their loan payments and have also experienced some sort of financial hardship. Short sales enable homeowners to make a new start without being required to pay the balance between their home’s sale price and the amount they owe on their mortgage.

The FHFA stated that when borrowers have sufficient assets to cover this loss, they must make some type of payment. Otherwise the lender may have the court issue what is known as a “deficiency judgment” against them. This allows the lender to collect what they still owe on the mortgage once their home has been sold.

Note that there are times when the housing market declines in an area, which causes property values to fall. If this partly explains why you are considering a short sale, this should be verified for the mortgagee with a comparative market analysis (CMA). This is something your real estate agent can take care of, and it will include the prices of homes similar to yours.

When you and your prospective buyer are ready to close the deal, the lender will need a copy of your listing agreement and the offer being made. At that point, your mortgagee may refuse to pay for termite inspections, protection plans and similar items, and decide to renegotiate commissions as well.

This article was written by Eric Stratton, a freelance writer with interests in real estate, investment, international finance and current issues. Mr. Stratton is a former chairman of Rush Industries, an organization which provides assistance to college fraternities and a frequent contributor to online media.



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