Short Sales get boost with new rules from administration

A “short sale” occurs when the homeowner sells their home at current market value and the lender agrees to accept that amount in full payment of a home mortgage that is typically much higher than the sales price.  Usually a short sale is done to avoid foreclosure, which is a difficult and painful process for both the homeowner and the lender.

Short sales can be a win-win-win.  They are less harmful to the seller’s credit score than foreclosure, and banks end up losing less on a short sale than they would on a foreclosure.   (One study says banks lose twice as much when they foreclose as they do with a short sale).  Not only that, but the house does not lie vacant, which attracts vandals and lowers all values in the neighborhood.

The problem with short sales has been that banks have made it very difficult to do.   You would have to find a buyer who makes an offer and then wait, sometimes months, for the bank to tell you whether or not they would be willing to accept the offer.

Under the new rules, banks are encouraged (and sometimes required) to agree to a price in advance, using normal appraisal methods, and to accept any offer that netted them 88% or more of that offer.

This should make these sales a lot quicker and easier.  And once you make a short sale under this program, the government will give you $3,000 for moving expenses. In addition if you buy a new home after selling you could qualify for a 1% subsidy if you get a loan insured by Fannie Mae or Freddi Mac.

The banks will still be leery of short sales, thinking homeowners are playing tricks on them.  You will not qualify if the cost of your mortgage does not exceed 31% of your income, or could be made to come to that number with an interest rate reduction.  For more details on the 31% issue, see our post on Qualifying for Mortgage Modification.

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