Editor's note: This is the third of a four part series on "Shattered Dreams" by attorney and Fox News Legal Analyst Bob Massi. Watch Bob answer your questions about the foreclosure crisis Thursday mornings on "Fox & Friends."
If you are truly strapped for cash and unable to make the monthly payments on your home, it may seem that the best option is to just unload the property for whatever someone will pay.
In an attempt to avoid having to pay the balance of the mortgage when the value of the house is less than what is owed, some homeowners will attempt to work with their lender to agree to accept a short sale. They will put the house on the market, get an offer, and take that offer—along with proof of hardship—to their lender. The lender can then agree to accept the offer of a reduced amount on the unpaid balance due to sale of the house. Sounds like the easy way out of a bad situation, right?
Wrong. The short sale is a less than ideal way to get out of home ownership for several reasons:
1. Your credit score still suffers a hit. You must be at least 90 days late in your payments (which can result in a deduction of up to 135 points from your FICO credit score) and show ongoing hardship in order for the lender to consider approving a short sale. Even if the sale is approved and your debt satisfied, it can 12-18 months or your credit to get back to good health. That’s a long time when landlords might be running credit checks to approve the rental you need because you no longer have a home.
2. You still might not be off the hook for the balance of the loan. That’s right. Your lender may agree to accept less than the value of the mortgage from the sale of your home, but they can also reserve the right to pursue a deficiency against you. In other words, once you give all the money from the sale of your house to your bank, the bank can then attempt to collect the difference between what is owed and what they accepted. In some states, the lender can try to collect this money for up to six years.
3. Whether or not the sale is approved is entirely up to the bank. And if you’ve already tried to get relief from suffocating mortgage payments you know exactly how quickly banks move to make decisions. By the time your lender has approved the terms of a short sale, the eager buyer you had found has likely moved on.
The last person I knew who was trying to buy a house that was up for short sale waited over 9 months for the bank to make a counter offer. If he had really needed to move into the house, he never would have been able to wait that long for an answer.
In order to simplify short sales, the government introduced HAFA (Home Affordable Foreclosure Assistance) a plan that promises to waive the deficiency between the amount of the sale and the amount owed on the mortgage.
The problem with the HAFA program is that a homeowner needs to have first been turned down for the HAMP (Home Owner Affordable Mortgage Program) option—which is essentially a government sponsored loan modification. By the time a homeowner is in a position to apply for the HAFA, they have been fighting red tape and bank disinterest for months and are facing foreclosure. If they are approved, they have only 120 days to sell their property. If they don’t conclude a sale, the house moves into foreclosure.
So like passengers on the deck of the Titanic, homeowners who think HAFA is the answer will patiently wait for help until the rising tide swamps their home, their finances and their credit.
Bob Massi is an attorney and Fox News Legal Analyst. Watch him discuss the foreclosure crisis on "Fox & Friends" on Thursday, August 18.