Avoid Foreclosure With a Short Sale

You might have heard the news that we're coming out of the Great Recession. Yet, you might still be unemployed - or underemployed. Unfortunately, the fact that it is a "jobless" recovery continues to squeeze people out of their homes. Mortgage companies are not doing a great job working with people to refinance or modify their mortgages. That's not going to change.

If you want to avoid foreclosure and you simply do not qualify for a refinance or mortgage modification, what can you do?

New regulations have just been adopted governing so-called "short sales." This is when you sell your home for less than you owe the bank, and you walk away from the debt. Compared with foreclosure, a short sale isn't quite as much of a black mark on your credit report. Banks are also generally happier because they do not get stuck with a property to own, manage and then try to sell, as they do after a foreclosure.

In the past, the short sale process has taken up to a year to complete - initiated by the property owner. However, new regulations passed this month and effective in April 2010 will streamline and simplify things for those that are considering their options.

Is a short sale is right for you? Read on.

In December 2009, the U.S.Treasury Department issued new guidelines for short sales in order to cut down on the hassle of the process, and speed it up! Effective in April 2010, the Foreclosure Alternatives Program includes the following features :

• Lenders/mortgage holders have only 10 days to approve or disapprove a short sale price.
• The borrower is entitled to $1,500 in relocation credit to ease the move and minimize taking on additional debt.
• Lenders/mortgage holders get $1,000, and second lien holders up to $3,000 when a short sale is approved, in order to encourage them to release the property for a lower price
• Loan servicers cannot require a reduction in realtor/agent commission on a short sale.
• Properties that may qualify must be a principal residence, under $729,000.
  

The average rate of foreclosures to short sales as of the date of this publication is 3 to 1. That means that there are many more foreclosures - and a fair percentage of them probably do not need to occur!

Astoundingly (if not surprisingly), nearly 25% of Americans are underwater on their mortgages. Once they are "trapped" in a property that is worth significantly less than when they purchased it, and then impacted by job losses and hiring freezes, paying the bills and getting out of debt can seem to be a hopeless proposition.

Of the non-foreclosure options, short sales are probably the most popular way to obtain debt relief for American consumers affected by the recession and predatory lending practices of the past decade. You may be able to discharge some of your debt outside of bankruptcy or foreclosure, and - under the Mortgage Forgiveness Debt Relief Act of 2007, you may not be liable for federal income tax on mortgage debt secured by a qualified principal residence.

The new Treasury Guidelines are not an early Christmas gift from the government. No, they've been adopted to help speed the recovery of the housing market.

When the federal government says that its streamlining a process and cutting down on paperwork, you've got to sit up and take notice! Of course, we won't really know the true impact of the new program until Spring 2010, when it goes into effect.

If your property is your primary residence and worth less than $729,000 (as described above), you may want to consider foreclosure prevention through a short sale. Several experts believe that the short sale reforms adopted in 2009 will be especially helpful in managing expectations. Ultimately, they can help make the "inevitable" happen more quickly, which will help not only the individual homeowners, but the economy as a whole recover more quickly.

The short sale guidelines will ultimately help banks, too. Mortgage servicers do not desire to manage properties. Foreclosed homes are often vandalized and lay vacant, decaying, and further losing value over time. By taking a short sale, a new owner takes the property and the bank gets immediate cash - without having to wait for a foreclosure sale to go through.

Although the short sale guidelines compress deadlines for banks to act, they also retain a great deal of control over the process. Borrowers must obtain pre-approved short sale terms before listing the property for sale. Reduction of paperwork will also mean fewer headaches for all involved (homeowners, banks, real estate brokers and purchasers).

While we cannot change the past lending mistakes and mortgage mess, the short sale reform guidelines will help move us into a brighter future, getting the banks out of holding and purchasing properties and back to lending funds for potential homeowners.