Short Sales Can Provide Debt Relief and Prevent Foreclosure

For homeowners who are in danger of having their property foreclosed upon, there may be better alternatives to a foreclosure. In early April, yet another addition was introduced as part of the Home Affordable Modification Program (HAMP). The purpose of this addition, named Home Affordable Foreclosure Alternatives (HAFA), is to provide less costly and more efficient options for homeowners facing foreclosure to help them get out of debt and possibly save their credit.A Short Sale Could be A Better Solution than ForeclosureOne of the alternatives in the program is called the short sale. A short sale allows a homeowner to sell his or her home at the current market value and give the sale proceeds to the lender instead of having to pay off the remaining mortgage amount. According to recent study done by Campbell/Insider Mortgage Financial, short sales have been increasing in popularity over the last several months, with the number of short sales exceeding the number of foreclosed-property sales. A short sale is less costly than a foreclosure and can have fewer implications for the borrower. This program will even allocate up to $3000 to the borrower for relocation expenses.The Lender’s Role in HAFALenders do not have to participate in the HAFA program, but they will receive certain incentives if they do choose to participate. One of the incentives is that the servicer of the loan can receive up to $1500 per short sale accepted. Lenders who participate in the program cannot collect the additional debt owed by the borrower after the home is sold; the lender collects the proceeds from the sale, but the remaining debt is erased. Before the homeowner enters the program, the lender must decide how much money they will accept for the home.If a homeowner has two mortgages, things can become slightly more complicated, especially if the lender for the second loan chooses not to participate in the program. Even though the primary lender would not be able to collect additional mortgage debt from the homeowner, the secondary lender would. Although, if the second lender does participate in the program, the amount they can collect is capped at 6% of the debt owed or $6000.How to be Eligible for the HAFA ProgramIn order to be able to participate in this program, homeowners must have already tried to get a loan modification under the HAMP program. They must show that they were not eligible for the program or that their attempts at loan modification were unsuccessful. Homeowners must have loans less than or equal to $739,000 to qualify, and they must be behind on their mortgage payments or in danger of falling behind.What a Short Sale Can Do For Struggling HomeownersIf a homeowner has been staying current on his or her mortgage payments, their credit score should not be as negatively affected by the short sale as by a foreclosure. If not, the homeowner’s credit score can still be adversely affected by the short sale, but he or she will not have to pay foreclosure fees. Before the Mortgage Debt Forgiveness Act of 2007, borrowers had to pay tax on the amount of debt that was forgiven. Now, if borrowers fill out a certain form, the forgiven debt will be erased by the government and completely forgotten.A short sale can help borrowers erase their mortgage debt and get a chance to start over without going through a lengthy, costly foreclosure process. In some cases, however, a foreclosure could be a better option than a short sale, especially if a borrower has more than one mortgage. Homeowners should speak with a home loan specialist to determine whether a short sale or foreclosure is a better option for their financial situation.