After the housing crisis that began in 2007, jobs went away, household incomes went down, property values went down, and many homeowners became financially unable to stay in their homes. As homeowners became unable to pay back their mortgages, they often owed more on their mortgage than their home was worth. They were “underwater.”
Struggling to pay your mortgage and looking for help?
As if distressed homeowners didn't have enough to worry about, with the pending foreclosure of their homes, they should also be mindful of the tax implications associated with the December 31, 2013 expiration of the Mortgage Forgiveness Debt Relief Act.
We’ve written extensively, these last few weeks, about the new guidelines for FHA’s Pre-Foreclosure Sale program which took effect in October. One aspect about the program that we haven’t talked about much is the issue of demonstrating economic hardship in order to qualify for an FHA short sale - and, in particular, FHA’s new “Deficit Income Test,” or DIT.
This is our fourth installment in our series about the changes to FHA’s Pre-Foreclosure Sale Program. In our last post, we looked at cash payments to the seller (borrower) on closing. In this post, we will look at the case where the seller is required to make a cash payment in order to close the short sale.
Continuing our series about the changes to FHA’s Pre-Foreclosure Sale Program, in this post we will look at cash payments on closing of a short sale: essentially, how an underwater borrower can be paid to get out of their mortgage. We’ve already talked about the new FHA Pre-Foreclosure Sale guidelines which took effect in October, the FHA Back to Work Program guidelines, and reviewed the differences between the two new streams: the “Standard” and the “Streamlined” short sale. Now we will look at what changes have been made in the requirements for cash payments, and what the differences are between the two new streams.
Until a few weeks ago, only borrowers who were owner-occupants could take advantage of FHA Pre-Foreclosure Sale Program. However, recent changes to the eligibility requirements for this FHA Short Sale Sale Program have opened up this program to many more homeowners - including investors. As of this month, borrowers may also use the program to short sale second homes, investment properties, and rentals.
Our last blog post was an introduction to the recent changes in the FHA Pre-Foreclosure Sale Program: reviewing the new “Standard” and “Streamlined” programs, and outlining what the new eligibility requirements are for each. But one of the biggest points of discussion online about the new FHA program lately has been regarding the Addendum about Arm’s Length Transactions - in particular, about the “no dual-agency” requirement that FHA tried to impose on brokers and agents.
New guidelines for the FHA Pre-Foreclosure Sale Program have taken effect as of this month. The changes were announced last July in HUD’s Mortgagee Letter 2013-23 (ML 13-23), with changes (or in HUD’s language, “delayed implementation” of one section of ML 13-23) listed in Mortgage Letter 2013-34 (ML 13-34).
Many homeowners worry about the consequences of undertaking a short sale, and paying their lender back less than the full amount owing on their mortgage. In many cases, their financial troubles are not their own fault: they fully intended to meet their lender’s terms and pay back their mortgage. But circumstances - including the global financial crisis and dropping property values, or other unforeseen events such as job loss or unexpected medical bills - have made it impossible to pay this mortgage. While many find that a short sale is the most graceful way to get out of a mortgage that they cannot pay, they also often are responsible borrowers who will likely want to re-enter the housing market in the future. So they worry:
Up until last week, would-be homebuyers who had undergone foreclosure, declared bankruptcy, or undertaken a short sale had to wait years before they would be eligible for an FHA-insured mortgage loan. But FHA’s new “Back to Work - Extentuating Circumstances” loan program, announced in Mortgagee Letter 2013-26, eliminates that waiting time for most borrowers!