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Real Estate Short Sales Part 2

Real Estate Short Sales, Government Help

In this part 2 of my Short Sales post I will discuss government programs related to short sales, short sales and your credit rating and scams related to short sales.

The short sale process is a confusing and long process as it is, add to that government involvement and the stress and strain can increase.  To those who qualify though, these government programs may be of benefit in the short sale process.  The two main government programs are the Home Affordable Foreclosures Alternative Program (HAFA) and a program for Veterans Administration (VA) guaranteed loans.

HAFA

The HAFA program is run by the U.S. Treasury Department in conjunction with U.S. Housing and Urban Development (HUD).  HAFA allows a homeowner to do a short sale or to do a deed-in-lieu of foreclosure in order to leave their current house that they can no longer afford.  HAFA may even provide money for relocation assistance after your current house has been dealt with.

To qualify for a HAFA short sale your loan must be owned or guaranteed by Freddie Mac, Fannie Mae or be serviced by one of the 100 or so Home Affordable Modification Program (HAMP) mortgage providers.  The easiest way to determine if you qualify for this program is to contact your mortgage company and ask them if they participate in the HAMP or HAFA programs and get the ball rolling from there.

Other requirements of the HAFA program are that you document your financial hardship, not owe more than $729,750 on your first mortgage, have obtained your mortgage on or before January 1, 2009 and not have been convicted of certain criminal charges within the last 10 years.  This link to the HAFA program will give you the finer details on the requirements and provides some contact numbers for some mortgage servicers.  It is always advisable to speak with a HUD approved mortgage counselor since they can give you the best options to pursue in your situation.

VA

For our men and women in uniform who have VA guaranteed loans, the VA has a program which they call the "Compromise Sale" program.  Under the Compromise Sale the VA can reimburse the lender for any shortfall in the amount owed.  The program does require the property to be sold for fair market value, with reasonable and customary closing costs, there must be a documented financial hardship for the seller and the Government will look at whether the compromise sale will be less costly than foreclosure for them.

Having satisfied all those requirements and having sold your home using a compromise sale the VA generally will not got after the borrower for the amount of the shortfall.  That being said any future borrowing using a VA loan will be limited as long as the shortfall that was covered by the VA is not repaid.  Once repaid the VA borrower may be again eligible to borrow for a house under the VA loan program.

Your credit and debt

After you have done a short sale, generally the lender is going to report the debt as "settled for less than the full balance" to the credit agencies.  This does affect your overall credit score and remains on your credit report for 7 years.  If you were late in making your mortgage payments prior to the short sale this is also reported to the credit agencies and will further hurt your credit score when combined with a short sale.

There is no way to avoid the impact of the credit downgrade.  After getting out from under a home that was a financial burden to you, you will need to concentrate on rebuilding your finances and credit over time to improve your credit score.  Credit and debt counselors can help you prepare a budget that will help you keep on top of your bills.  By paying bills on time and managing your credit responsibly your credit score will start to recover.  To find a list of credit counseling agencies head on over to this link at U.S. Department of Justice.

While the shortfall amount you owed to the lender may have been release through the short sale process, that does not mean you are out of the woods yet.  Under the US Tax Code a cancelled debt can be a taxable event.  In the past Congress passed a law to exempt certain forgiven debts that were related to housing.  That law expired with the 2013 tax filing year.

In order to account for the forgiven debt your lender will send you a 1099-C form detailing the amounts you did not have to pay back.  That form must be reported on your tax form in the year it was received and you may be taxed on the amount you did not have to pay back.  Talk to a tax professional to find out if you have to pay tax and what other options you may have.

Watch Out For Scams

Anytime money will be involved you can be sure there will be someone trying to get into that business with bad intentions in mind.  During the stressful time of trying to do a short sale try not to let your guard down when dealing with any organization or company who offers mortgage counseling solutions. Ask questions about the credit and mortgage counseling company and people who will be helping you.  Ask about their certifications and training.  Check with knowledgable realtors, attorneys, CPAs to get referrals to legitimate organizations.  Use the internet to research these companies online.  For mortgage counseling organizations try going with a HUD approved counseling agency by clicking on this link and searching for one in your area.  For credit counseling agencies see the Department of Justice link above.  

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