New Federal Short Sale Program Gives Hope To Struggling Home Sellers

Trying to get a short sale of your house can be frustrating. However, there is hope in sight. New short sale rules will be issued by the Federal government in April 2010. The Home Affordable Foreclosure Alternatives Program, or HAFA, will go far in streamlining short sales and preventing short sale deficiency judgments.

Why have a Federal short sale program?

The HAFA program was developed by Congress to put an end to the unpredictable short sale process by making a standard short sale process for all lenders, home owners and home buyers to follow.

  • At present, short sales are confusing, haphazard and inconsistent in lender response time and policies.
  • Some lender turn times are 30 days, others are as long as 90.
  • Potential buyers often get frustrated and move on to another property.
  • Homeowners shift back and forth from relief to panic as they see a way out of their housing and credit dilemma and deal with the panic of their lender declining their short sale request.

Effects of short sales on lenders

Currently in Arizona, there is no deficiency judgment on a first mortgage, but one can be filed for a second mortgage if it was taken out after the first mortgage. The lender can also send a 1099-C to the seller and the seller must pay taxes on and report their short sale loss.

Effects of a short sale on homeowners

If you receive a 1099-C from your lender, remember that the Mortgage Forgiveness Debt Relief Act of 2007 allows a waiver for this income if the you meet the guideline criteria. IRS Form 982 is the work sheet used to apply for the waiver.

The home seller’s credit will take a hit from a short sale, and there is a waiting period for most home sellers who go through a short sale before they are eligible to buy a home again. The waiting time is less than a Foreclosure or Deed in Lieu of. Fannie Mae’s waiting period is 2 years for short sales (4 years after a short sale if downpayment is less than 20%, and mortgage insurance is needed), 4 years for Deed in Lieu of, and 5 years for a Foreclosure. FHA now requires a 3 year waiting period whether the home buyer has had a short sale or foreclosure.

Good News About Short Sales

As mentioned, in April the Home Affordable Foreclosure Alternatives Program (HAFA) goes into effect (it retires in 2012). This Federal initiative establishes uniform standards for all lenders. HAFA lays out the timetables, forms to be used, and expectations for the lenders, sellers and buyers. Provisions of HAFA prevent lenders from pursuing deficiency awards. Additional HAFA benefits include relocation incentives, standardized realtor compensation, and assistance with settling subordinate liens, just to name a few.

Short sales can be a good solution for troubled homeowners. The sale prices accurately reflect the market for the neighborhood, and place a new homeowner onto the tax rolls while the property is in good condition. If HAFA can streamline this cumbersome process, then it is a winning combination for all involved.