Homeowners are curious about how does a short sale work under Making Home Affordable. This government sponsored program was initiated in 2009 as a means to help homeowners save their home through loan modification or mortgage refinance. The program now offers foreclosure alternatives including short sales and deed in lieu of foreclosure.
To provide a precise answer to how does a short sale work is difficult because every lender adheres to different protocol. Even lenders that participate in the Home Affordable program do not follow exact guidelines. However, there are some basics that nearly every lender requires.
The best place to start is the Making Home Affordable website. Homeowners can review a list of participating lenders and review short sale eligibility criteria. It is advantageous to apply for mortgage relief under MHA because lenders are required to respond to requests more promptly.
Short selling is available to qualified homeowners via the Home Affordable Foreclosure Alternatives (HAFA) program. Homeowners are required to list their home through a real estate agent for at least 120 days before submitting their application.
The term 'short sale' means the house is sold 'short' of the amount owed against the loan. Many banks hold homeowners responsible for the difference between the sale price and loan balance. When homeowners obtain approval through MHA they are released of the financial responsibility.
If homeowners are entering into an agreement with lenders that do not participate in Home Affordable it is crucial to determine if the bank demands payment of deficiency amounts. Deficiencies often amount to thousands of dollars that can take years to repay.
If homeowners do not pay deficiencies at the time of sale, banks can obtain deficiency judgments and engage in collection actions such as wage garnishment. Judgments are detrimental to credit scores and remain on credit reports for as long as 10 years after the debt is paid.
The short sale process requires homeowners to undergo financial audit to ensure they do not possess funds that could be used to cure mortgage arrears. Banks review wage statements, bank records, tax returns, and financial portfolios. Homeowners must also provide information about the buyer including their prequalified financing documents, lien release, and a HUD-1 Settlement Statement.
Homeowners will need to compose a short sale hardship letter which provides a chronological timeline of events that led to mortgage default. As a real estate investor who specializes in distressed properties I can attest to the fact that hardship letters are an essential element for obtaining approval.
Mortgage providers are generally more receptive to homeowners who are proactive in resolving financial problems. It is important to let banks know what you have done to reduce expenses. If you've taken a part-time job, sold a second car, or eliminated cable or cell phone bills include the information in the hardship letter. It isn't necessary to document every penny saved, but do include actions that have significantly reduced household expenses.
The average duration of the short sale process is 4 to 6 months. Upon completion, short sales are reported to the three major credit bureaus and can severely impact credit scores. It will be advantageous for homeowners to engage in credit repair strategies soon after the sale closes.
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