Is Your Home Under Water?

by Lori R. Somekh on Aug. 16, 2017

 General Practice 

Summary: If so, the timing may be better than ever to consider a short sale. Is the amount owed on the mortgage more than the value of your home? This is referred to in the media as being "under water" or "upside down." In this situation, lenders will sometimes agree to a short sale.

If so, the timing may be better than ever to consider a short sale.  Is the amount owed on the mortgage more than the value of your home?  This is referred to in the media as being "under water" or "upside down."  In this situation, lenders will sometimes agree to  a short sale. What this means is that the homeowner sells the property to a third party at the present fair market value and the lender agrees to accept less than the full balance owed in satisfaction of the loan.

 In a short sale, the lender must approve the sale, approve the closing expenses to be paid out of the sales proceeds (including broker commissions, unpaid water charges and real estate taxes, violations, liens, judgments, and other fees and encumbrances), and approve the net amount left over that will go to the lender as settlement of the mortgage debt.

Home Affordable Foreclosure Alternatives

The Home Affordable Foreclosure Alternatives (HAFA) program is a component of the Making Home Affordable Program and the Home Affordable Modification Program (HAMP). HAFA offers additional options to eligible borrowers who did not qualify for or complete a permanent modification under HAMP or another home retention option to avoid foreclosure. HAFA solutions help stabilize communities by limiting foreclosures in surrounding neighborhoods and allow affected borrowers to transition into more affordable housing.  HAFA is also due to expire on December 31, 2013.

If a homeowner is eligible under this program, he may get his real estate commission, attorney's fees, back taxes and water charges and outstanding violations paid out of the proceeds.  He may also receive money to relocate.  Depending on the lender, the amount can be from $3,000 up to $35,000.

HAFA offers incentives to borrowers, servicers and investors who utilize a short sale or deed-in-lieu of foreclosure to avoid foreclosures.  Another reason that now may be the time to consider a short sale is that pursuant to IRS Pub. 4681, untilDecember 31, 2012, homeowners will be able to exclude the amount of debt forgiven from their ordinary income.

A short sale can be a win-win situation for the homeowner and the bank.  It allows the borrower to get out from under an unaffordable debt, while making the bank as whole as possible in today's market. The bank minimizes its loss and avoids the time and expense of foreclosure and resale of the home, and the homeowner minimizes the damage to his credit compared to foreclosure.

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