New federal rules make ‘short sales’ easier

New federal rules will make it easier and quicker for homeowners to qualify for a “short sale” of their property.

A “short sale” occurs when a home is worth less than the amount owed on the mortgage. The lender agrees to accept less than the full amount of the loan, and the owner is able to escape the mortgage debt and avoid foreclosure.

In the past, short sales have often bogged down in delays and cumbersome regulations.

The new rules apply to mortgages held by Fannie Mae and Freddie Mac. Together, the two companies own mortgages on about 4.6 million homes that are “underwater” (worth less than the outstanding mortgage debt). Of those homes, about 80% of the owners are current on their payments.

Under the new rules:

  • For borrowers who are behind on their payments and in serious financial trouble, the required documentation has been drastically reduced. Documentation is essentially eliminated for anyone who is at least 90 days behind on payments and has a credit score of less than 620.
  • For borrowers who are current on their payments, mortgage servicers can now process short sales without additional approvals from Fannie or Freddie if the borrower has a hardship. Eligible hardships include the death of a spouse, divorce, disability, and a job transfer more than 50 miles away.
  • Military personnel who are transferred are automatically eligible for short sales, and Fannie and Freddie will not ask them for any additional payment to cover the shortfall, even if they could afford a partial payment.
  • For borrowers who have a home equity line, Fannie and Freddie can now offer the second lender up to $6,000 to gain its approval for the sale. Previously, there was no set limit, and many home-equity lenders repeatedly delayed approval of short sales as a tactic to negotiate for a larger repayment.
  • Mortgage servicers must now review all short sale offers within 30 days, and give the borrower a final answer within 60 days.