Due to the decline of property values during and after the rescission, a large number of homeowners are going for short sale in order to get rid of their mortgages. In a short sale, the lender sells off the property at a price which is lower than the outstanding mortgage balance of the borrower. Thus, there results a deficiency amount from the sale of the property. This deficient amount needs to paid off by the ex-homeowner.

The short sale process seems easy but issues get complicated when a borrower goes for a private mortgage insurance (PMI) as he or she is unable to pay a down payment of 20%. The lender will contact the PMI Company in order to recover the deficient amount that results from the sale of the property.

What happens when lender sends the loan file to the PMI company?
The bank will send your file to the PMI company who will decide what they would accept. The PMI company does not have a guideline for what they would accept. The approval for the short sale depends upon the amount of the loss, the coverage ratio and the fair market value (FMV). The coverage ratio is the percentage of the loss that the PMI insures.  It is actually a percentage of the total debt. This percentage can vary widely from one company to another.

What role does a promissory note play in a short sale?
In the recent times, the PMI companies, along with the lenders, have started asking the borrowers to sign a promissory note in regards to the deficient amount. This frustrates both the borrowers as well as their agents. If the borrower agrees to sign the promissory note, the he/she will have to pay back the amount that they receive from the PMI company. This will reduce the losses of the PMI company.

What happens when a borrower refuses to sign promissory note?
Many a times, when the borrower refuses to sign the promissory note, the PMI company refuses to approve the short sale thereby forcing the lender to foreclose the property. If the lender forecloses the property, it will take a long period of time for him to complete the whole process. Thus, the PMI company will be able to put off the payment of claims to the lender for 12-24 months. But again, if the market improves, the lender will make a lower claim which will be a profit for the PMI company.

With the introduction of the Home Affordable Foreclosure Alternatives Program (HAFA) on April 5th, new rules and guidelines have come up for the lenders. This new program is an extension of the HAMP (Home Affordable Modification Program) and will in turn help the borrowers further in safeguarding their property against foreclosures.

Let’s take a look at some of the specifics of the HAFA program:

1. Hardship information - The financial hardship information provided by the borrower under HAMP will be taken into account while considering him/her for this program.
2. Pre-approved short sale terms - Under this program, the borrowers will receive pre-approved short sale terms. They would receive these terms and conditions prior to their listing of the property with a real estate agent.
3. Future liability - The borrowers will be released from the future liability in regards to the loan. The lender will not be able to come after the borrower for any kind of deficiency judgment or cash contribution.
4. Financial incentives - The HAFA program provides financial incentives for servicers to cover administrative and processing needs. It also offers financial incentives including $3,000 for borrower relocation assistance.
5. Participating servicers - All the servicers participating in HAMP to will have to implement HAFA in accordance with their own written policy. However, the guidelines should be consistent with investor guidelines
6. Tenure of the program - The HAFA program comes to an end on December. 31st, 2010.

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With the crisis in the real estate market, the American dream of homeownership has come to an abrupt end. Lots of people have lost their homes in foreclosure and many more are delinquent on their mortgage payments. Most people are facing such a situation mainly due to job loss. However, there are some homeowners who can afford their mortgage but are struggling to make their payments.  Such borrowers are tempted to walk away from the property in order to make a fresh start.

However, walking away from property is not a very good option in my opinion as it would ultimately lead to foreclosure. Take a look as to how it can affect you:

Credit effects: If you walk away of the property, it will result into foreclosure. The lender would sell off the property to recover his dues. You would be responsible for paying the deficient amount. It will lower your credit score by 250 points and you won’t be able to get a loan for the next 3-4 years. Moreover, the foreclosure would remain on your credit report for the next 7 years.

Tax penalty: If your lender forgives the deficient mortgage balance resulting from the sale, then you will have to pay taxes for that forgiven amount. The balance amount would be considered as your income and the IRS will charge you the income tax. However, with the Mortgage Debt Relief Act in vogue, you won’t be liable for paying the taxes on the deficient amount from the sale of your primary residence if the debt was incurred between 2007 and 2012. After that, the taxes are planned to kick back in.

So, you must be thinking that there’s no respite. No one’s there to help you from this mortgage mess, isn’t it? However, that’s not the case. You can get help provided you take the right step at the right time. Just have a look:
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