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. But new rules make short sales a much faster and easier process.Short sales, despite the name, have always taken a long time to process. That's because the short in short sale refers to a shortage of money and not time. Buying a house via short sale allows a homeowner to sell their property for less than what's owed on the mortgage, with the lender's approval.
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.
But 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."
Of course, reading about all of these rules might easily persuade a homebuyer or owner to stay away from the short sale. But keep in mind that the real estate specialists and bankers are the ones who contend with the paperwork and phone calls, and that's why a Realtor is there -- to help walk you through the process.
And why go through the process? For the seller, a short sale can be a lifesaver compared to having your house foreclosed on you. Not that it's a much better situation -- you still end up losing your house with only $1,500 to show for it -- but at least you can leave with dignity, presumably less stress and while your credit score will get hit, it won't be clobbered with as much force as a foreclosure.
For the homebuyer, short sale homes can be a deal but aren't likely to be a steal. Lisa Johnson cautions that nobody should expect banking miracles: "It's very common for the seller of a short sale to have 20 to 30 offers where only one or two of them are realistic, so I'm hoping these rules, like the preapproval letter from the lender, with this new preapproved price on it, will alleviate some of that confusion and have buyers understand that if a house has been approved to sell at $250,000, they won't be able to offer $150,000 for it."
She also adds that a house that has gone through a short sale, versus one that has been foreclosed, is usually in better shape for the buyer since it hasn't been abandoned for months, and that no seller is likely to have exited, trashing the home in anger. So maybe you won't get a bargain basement price that you might get with a foreclosed home, but it won't look like it belongs in a bargain basement bin either.
In any case, something had to be done to help the short sale process along, says Leslie Johnson (no relation to the aforementioned Lisa Johnson). She says that the short sale process has been taking so long that "the buyer has either walked away from the property, or buyers' circumstances have changed, and the buyer can no longer purchase the property."
She also notes that in some instances, the banking guidelines have changed, and buyers have no longer qualified. That, of course, could happen again as these new rules are instituted, but hopefully not. With any luck, the byzantine bureaucracy of new rules surrounding short sales should make these homecomings and goings a much happier experience. In fact, let's go with a cornball ending and make the observation that the new rules may make the process a piece of cake -- short cake.
Geoff Williams is a frequent contributor to FrontDoor.com. He is also the co-author of the new book Living Well with Bad Credit (HCI Books).