New Short Sale Rules: What You Need to Know

For too long, the experience of going through a short sale had come up, well, short

By Geoff Williams, FrontDoor.com | Published: 3/23/2010

After April 5, short sale transactions should become easier and faster for both homebuyers and sellers.

This year, the U.S. Treasury Department set new rules to make short sales a much faster and easier process. That's because traditionally, short sales involved very little order or standards, so the process tended to drag out. A seller would typically wait several months for the lender to accept a buyer's offer, if it did at all.

Some people in the trenches aren't so sure the process will go much faster. "If the new guidelines are successful, I will be the first to shout it from the roof tops," quips Leslie Johnson, a Realtor who works for Prudential Network Realty in Orange Park, Fla., and has a wealth of short sale experience. But she is dubious about the rules. "Unless banks are hiring a large new group of employees across the board to help with the short sales, I don't know how they will accomplish what they have planned."

She may be right. For starters, only banks that owe the federal government TARP (Troubled Asset Relief Funds) bailout funds have to participate in this program. But there are carrots designed for all banks to join in, like offering $1,000 to lenders for administrative costs. The changes, if they work the way they're supposed to, include:

• Buyers have to offer documentation of funds or a preapproval letter from a lender with their offer for a short sale; if you're selling your house, you have to give this to your lender within three days.
• Lenders have to approve or deny the offer within 10 business days.
• To avoid kicking the existing homeowner out to the curb, the lender can't require a closing earlier than 45 days from the date of the sales contract unless the seller gives his or her okay.
• If you're buying a house through a short sale, you can't sell it for another 90 days. Most people wouldn't be dreaming of selling their house so soon, but flippers, out to make a quick buck and able to screw up the market with inflated prices, would. This new rule is designed to help prevent that.
• Short sales through HAFA (Home Affordable Foreclosure Alternatives program) aren't allowed to involve selling the property to a friend, family member or anyone with whom you have a close personal or business relationship.
• Up to $3,000 will go toward paying the junior lien holders to release their lien.
• No foreclosure can occur during the marketing period specified in the short sale agreement.
• Mortgage services can no longer charge fees to borrowers who opt for a short sale instead of a foreclosure. Nor can they lower real estate agent commissions after an offer has been received.

Lisa Johnson, a Realtor with Coldwell Banker in Haverhill, Mass., and someone who specializes in short sales, is generally happy with the changes, although she is equally skeptical that short sales are going to be done in a shorter amount of time. "I don't see how they can do it. As it is now, I have a pretty fast return time on short sales," says Johnson. "Under 60 days, which is considered a big deal because I'm working at it every day."

But she likes the rules in general, and one that she particularly is pleased with is that the new short sale program "will give the homeowner money to move," says Johnson. As in, each seller leaving their home will get $1,500.

"Most of the time, they don't have any money to move," laments Johnson. "Last week, I was literally posting on my Facebook page, asking for suggestions on where this single mom might move to. She had lost her house, had to sell it through a short sale, and once the offer was accepted, she needed to be out in two weeks. And it's not like she was lazy about this. She's a single mom with an infant and an 8-year-old boy and is going to school full time. And if she had gotten that $1,500, that would have been an enormous help to her. That could be the money you need for a down payment on an apartment."

NEXT: More on short sales: What's in it for homebuyers and sellers? >>

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