Last week, we discussed the Department of Housing and Urban Development’s (HUD) delay of the dual agency ban on short sales. Now, there’s more to know about short sale requirements and how they’ll affect potential homebuyers. Despite the government shutdown earlier this month, HUD announced new short sale requirements that are effective as of October 1, 2013. These requirements represent changes to the current ones currently in use by the Federal Housing Administration (FHA). A recent article from DSNews.com outlined key features of the new requirements and the ways in which they’re likely to affect sellers and homebuyers alike.
If you have questions about buying a short sale or a foreclosure, it’s important to speak to an experienced real estate attorney. These transactions are more complicated than a typical home sale. The dedicated lawyers at the Emerson Law Firm deal with short sales and foreclosures everyday, and they can answer your questions today.
Short Sale Sellers and the New Requirements
In order to sell a pre-foreclosure property, you’ll need to complete a short sale under the FHA short sale program. As such, it’s important to know about the requirements of the program and what you’ll need to do to complete the sale:
· First, if you’re the seller of the property, you cannot list the property with, or sell it to anyone with whom you’re related or with whom you have “a close personal or business relationship.” In other words, the law would refer to this as an “arm’s-length” transaction.
· Second, if you violate this “arm’s-length” requirement, you could end up being in violation of federal law.
· Third, you must currently be in default on your mortgage, and your mortgage must specifically be in default on the date that the short sale closes. In addition, you’ll have to make sure to have any additional liens on your property released before closing. (If a lienholder demands a payment in order to release its lien, that lienholder will have to submit a written statement that says it will release the lien as soon as the amount is paid, according to DSNews.com).
In addition, one particular new condition for short sales is that sellers might have to make a final payment, or a “cash contribution” before the transaction closes. According to DSNews.com, “this payment will reduce the deficiency balance.”
Mortgage Servicers and the New Requirements
What else do you need to know? There are also requirements for servicers. According to the new HUD requirements, servicers have to use a Deficit Income Test (DIT) in order to figure out a homeowner’s financial hardship. This test is used to confirm all of a homeowner’s expenses. What’s this for? In brief, it’s used to ensure that the short-sale seller is also the party that’s currently occupying the property. In other words, in order to be eligible for a standard pre-foreclosure sale, you must also be occupying the property—only owner-occupants are eligible.
Of course, there are some exceptions. Homeowners who are eligible for streamlined short sales might not have to submit to financial hardship requirements, and in some of these cases, second homes and investment properties may be eligible for short sales.
Key Terms of the Arm’s-Length Transaction
While all the short-sale requirements are important, the key revision to the FHA’s short sale program is the arm’s-length transaction requirement. We mentioned this above, but it’s important to know precisely what it is according to the law.
Under the FHA short sale program, an arm’s-length transaction is defined as “a short sale between two unrelated parties that is characterized by a selling price and other conditions that would prevail in an open market environment.” In addition, “no hidden terms or special understandings can exist between any of the parties . . . involved in the transaction.” This latter requirement refers to all parties involved in a short sale, including but not limited to: the buyer, the seller, the appraiser, the sales agent, the closing against, and the mortgagee.
These terms can seem confusing to many sellers and potential homebuyers. If you have questions about buying a short sale or about the short sale requirements for current homeowners, contact the experienced real estate lawyers at the Emerson Law Firm today.
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