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Common Short Sale Myths Dispelled

by devteam January 14th, 2014 | Share

Thanksrnto key changes in the program, completing a short sale through Freddie Mac isrntaking less time than ever before.  Therncompany’s Senior Vice President Tracy Mooney, writing in Freddie Mac’s Executive Perspectives Blog, said thatrndespite the improvements and that short sales are an important tool for helpingrndistressed homeowners avoid foreclosure and eliminate their mortgage debt, theyrnremain a mystery to many who might benefit from them.  In her occasional column “Dispelling thernMyths” Mooney lays out eight misconceptions about short sales and the facts shernsays every distressed homeowner should know.</p

The first myth is that the homeownerrnwill be responsible for the entire amount owed on the mortgage.  Under the company’s Standard Short Salernprogram, borrowers who complete a short sale in good faith and in compliancernwith all laws and Freddie Mac policies will not be pursued for the after-salernmortgage balance.  However, if a borrowerrnhas the financial ability he/she may be asked to make a one-time payment orrnsign a promissory note for a portion of that balance.</p

Many homeownersrnthink a short sale is not possible for an investment property or secondrnhome.  Mooney said the important factorrnis whether the borrower meets the program’s eligibility requirements, not thernstatus of the property itself.  </p

The thirdrnmyth is that a homeowner must be delinquent on the mortgage to be eligible forrna short sale.  A homeowner who is currentrnmust meet the general eligibility requirements for the program and have arndebt-to-income ratio greater than 55 percent. rnIn addition, in this case the property must be the homeowner’s primaryrnresidence.</p

Homeownersrnsometimes presume they won’t qualify because of their servicer’s strictrnguidelines about short sales.  But Mooneyrnsays that Freddie Mac has increased the authority of its servicers to approve short sales for qualifying financialrnhardships for homeowners who are past due or current on theirrnmortgage.  Servicers also now have independentrnauthority to approve short sales without a separate and potentiallyrntime-consuming review by the mortgage insurance company.</p

Myth #5 is that a short sale willrnaffect a homeowner’s future eligibility for a mortgage.  If the financial difficulties arose from circumstancesrnoutside the borrower’s control such as job loss or a health emergency he/shernmay be eligible for a new Freddie Mac mortgage with a minimum of 24 months acceptablerncredit after the short sale.  If thernshort sale was necessitated by personal financial mismanagement the buyer mightrnneed 48 months of acceptable credit to obtain a new Freddie Mac loan.  Mooney advises all homeowners to beginrndiscussions with a lender two years after the short sale closes to find outrnabout specific requirements in their individual case.  </p

Manyrnpeople think that short sales can take a long time but Mooney reiterates that underrnthe new guidelines timelines are shorter than ever.  Servicers now have 30 days to make and communicate a decision once they receive arncompleted application and, once approved, the sale should take less than 60rndays to close.  She says that workingrnwith an experienced real estate agent might further speed the process </p

It is alsorna mistaken belief that having a second mortgage will make a short salernimpossible.  If other eligibilityrnrequirements are met a second mortgage is not necessarily a barrier becausernFreddie’s short sale program can offer second lien holders up to $6,000 tornrelease their lien and extinguish the underlying debt</p

The finalrnmyth is that a short sale will ruin a homeowner’s credit. While only the creditrnreporting agencies can determine how a credit score will be computed it isrnpossible that a short sale could be less damaging than a foreclosure.  Even if this isn’t the case a short sale canrngive a homeowner time to arrange other housing and exit homeownershiprngracefully.</p

Mooneyrnsays a homeowner should consider a short sale if </p<ul type="disc"<liHe/she does not qualify for anyrnoptions to keep the home; </li<liNeeds to move in order to keep orrnobtain employment.</li

  • Doesn’t think the home will sell at a price that willrn cover the outstanding mortgage amount.</li</ul

    The first step in the process is torndetermine if Freddie Mac owns the mortgage by using its  Loan Look-up Tool.   If it does the next step is to contact thernmortgage servicers.  Contact information,rnMooney says, should be listed on the monthly mortgage statement or in therncoupon book.

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  • About the Author

    devteam

    Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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