The shortcomings of short sales (© Lance Iversen/San Francisco Chronicle/Corbis)

Homeowners struggling to sell their homes in a short sale are getting some relief, thanks to the federal government's Home Affordable Foreclosure Alternatives (HAFA) program.

Up to now, many short sales — in which the lender accepts a sale of the property for less than the full amount owed -- have taken months to complete. Sometimes, the complex and lengthy process has failed, resulting in foreclosure.

HAFA establishes streamlined short-sale rules and provides incentives for borrowers and lenders to work together to avoid foreclosure. The rules — in effect between April 5, 2010, and Dec. 31, 2012 — also are intended to speed up the short-sale process.

"The streamlined short-sales process will definitely help homeowners," says David Liniger, Re/Max International chairman and co-founder.

Before HAFA, homeowners often listed their home for sale without an idea of what the lender would accept.

"A lot of sellers and their Realtors have not been able to sort out the problems with short sales and have given up on the process because, even after sending in the correct paperwork, they have sometimes waited three or four months for their lender to respond," Liniger says.

Under HAFA, borrowers receive pre-approved short-sale terms from the lender before putting the home on the market.

Lisa Matykiewicz, a Realtor and certified distressed property expert in Gilbert, Ariz., says the updated short-sale rules establish an easy-to-understand process with defined steps that "make it easier for everyone to understand."

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Eligibility requirements
The HAFA guidelines apply to lenders that voluntarily participate in the Home Affordable Modification Program (HAMP). The Department of Housing and Urban Development says more than 100 servicers have signed up to participate in HAMP, covering more than 89% of mortgage debt outstanding in the country.

To be eligible for HAFA, homeowners must first apply for a loan modification through HAMP. Owners who do not qualify for a loan modification or miss payments during the initial loan-modification period qualify for HAFA.

Other HAFA requirements include:

  •  Property is principal residence.
  •  Mortgage originated before Jan. 1, 2009.
  • Mortgage is owned or guaranteed by Fannie Mae or Freddie Mac.
  • Borrower is delinquent or default is foreseeable.
  • Homeowner demonstrates hardship.
  • Borrower's total monthly housing payment exceeds 31% of gross income.
  • Unpaid principal does not exceed $729,750.

According to HAFA rules, lenders now must offer a short sale in writing to the borrower within 30 days if the borrower does not qualify for or complete a loan modification. Borrowers then must respond within 14 days to the lender's short-sale agreement.

"I think it's great that the lenders in this program have to offer a short sale before going to foreclosure," Matykiewicz says.

When a purchase offer is made, borrowers must submit the sales contract to the lender within three days, along with the buyers' mortgage pre-approval and the status of negotiations with other lien holders on the seller's property.

Finally, lenders must approve or deny the contract within 10 days.

HAFA rules also state that lenders must release borrowers from the obligation to repay the difference between the sales price and the loan amount. No deficiency judgments are allowed for a first or second loan.

Other incentives
In the past, short sales were especially difficult for homeowners with more than one loan on their home, since the home sale typically repaid only the first mortgage. HAFA's financial incentives include a payment of up to $3,000 for second mortgage holders.

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"Second trust lien holders are often owed five or 10 times that $3,000 payment," Liniger says. "But if the property goes to foreclosure, the second trust holder is not likely to get any money at all. This at least guarantees they get something."

Other HAFA financial incentives include $1,000 to loan servicers to cover administrative fees, up to $1,000 for mortgage investors who agree to share short-sale proceeds with second lien holders and $1,500 to the homeowners for relocation.

"The moving expense allocation acts as an incentive for them to stay in the property until the short sale goes through," Liniger says. "Owner-occupied properties are usually in better condition than vacant homes."