Good news for home buyers trying to keep their head above water.
Regulatory changes are helping them stay a little drier. And the changes are also helping smart real estate professionals, who are poised to make the most of the new opportunities.
You’ve probably heard of a “short” sale, when a home is sold for less than the amount due on the mortgage. You also probably know that being “underwater” means that a mortgage is a greater dollar amount than the current property value of the house.
Some buyers who can’t afford their steep mortgage payments try to keep their heads above water by short-selling their underwater property (which, of course, never really was “theirs” … it belongs to the mortgage holders).
What do the mortgage holders have to gain? Well, they absorb the loss of the short sale, but they are then free to sell the property—usually at a price greater than what they would get if the home had gone into foreclosure. During the fourth quarter of 2012, the average discount on a short sale was 23 percent; the average foreclosure sold for 39 percent below market. So you can see it’s in the banks’ best interest to keep those properties out of foreclosure – no pocket listings involved.
The U.S. Department of the Treasury Home Affordable Foreclosure Alternatives (HAFA) program was started in 2009 to help people in trouble with their mortgage transition to more affordable housing. It lays out rules by which the mortgage companies allow buyers to sell their homes for amounts that fall “short” of what they still owe.
Short sales are not an easy way out. Home buyers have to apply, prove financial hardship and undergo a complete check of their assets to makes sure they qualify. But HAFA makes the short sale process easier and offers owners some protection by establishing guidelines that banks must adhere to during a short sale. Some of these guidelines include:
- Buyers can get free advice from counselors and licensed real estate professionals approved by the U.S. Department of Housing and Urban Development (HUD).
- Buyers are released from their mortgage debt after the sale of the property. The deficiency (the amount that falls “short”) is waived by the servicer.
- Buyers are allowed to work with the mortgage lenders to agree on an acceptable sale price.
- Buyers suffer a less negative effect on their credit scores than they would during foreclosure or during a conventional short sale.
- Buyers may get $3,000 in relocation assistance.
As of Feb. 1, new HAFA guidelines are expediting the short sell process and giving owners of distressed properties options that they didn’t have during the worst part of the housing market meltdown. Here are a few key points about short sales and about the new regulations. If you’re in the real estate business (or if you’re thinking of getting into the real estate business), take note. This stuff is changing the game:
- Nearly half of all home sales last year were “distressed” property sales. Foreclosures accounted for 11 percent of all home sales; short sales accounted for 32 percent. That’s about three short sales for every sale of a foreclosed home.
- A short sale can now take place in a 30-day window (it was 45 days previously). This means the lender is required to verify eligibility for and allow the short sale—or make a counter-offer—within 30 days. This means borrowers in financial trouble don’t have to wait as long to get the answer they’re waiting for.
- The resale turnaround is 30 days (reduced from 90 days). Resale prohibitions intended to prevent fraud stated that the buyer must agree not to resell the property within 90 days of closing—the window is now 30 days. However, the buyer cannot sell property for more than 120 percent of the HAFA short sale price unless he or she waits 90 days after closing.
- Treasury Department short-sale forms are being replaced with shorter forms. A simpler short sale notice (SSN) form that doesn’t have to be signed by borrowers or agents is replacing three Treasury Department forms that made an offer from the lender that the borrower either accepted or rejected. Now, the SSN is simply a pre-approval that gives the borrower the right to proceed with a short sale under specific terms.
- Short sales are actually doing a lot for the market. They’re clearing out inventory and stabilizing prices. There’s no doubt that the increased number of short sales pushed distressed home prices higher and strengthened the overall housing market last year.
All of these changes will no doubt accelerate the number of short sales through the rest of this year and beyond, so if you’re in the real estate market, make sure you’re prepared to make the most of this growing opportunity.