Should I choose a HAFA short sale?

Should I choose a HAFA short sale?

Many Connecticut homeowners that have decided to short sell will inevitably be offered the option of choosing to go with the lenders traditional short sale program or HAFA (Home Affordable Foreclosure Alternatives)- government's short sale program.

While HAFA was originally touted as a "streamlined" solution to help underwater American homeowners and offers some benefits such as full debt forgiveness and $3,000 cash incentive, the reality of HAFA has proved to be quite different.

The decision to opt in or out of HAFA should not be taken lightly and here I have outlined the realities of both scenarios to help you make a decision.

The pros and cons of your lenders traditional short sale program vs. HAFA

Lenders in-house traditional short sale program PROS:

• Improved timelines. Most big lenders have been processing short sales consistently for several years now  and their processes have much improved. From my experience the current approval time for a short sale with one of your big lenders - Bank of America, Wells Fargo, GMAC, Citi, Chase will be anywhere from 3-7 weeks ON AVERAGE. Over time most lenders have picked up the pace and are decent to work with.
• Flexibility in short sale negotiations. There are a lot of variables in any short sale, and a lot of different terms that may need to be negotiated or re-negotiated such as payoffs to junior lienholders, timelines to close, etc. While most lenders are not fun to negotiate with, most of the time they will have some flexibility and a lot of items are able to be renegotiated to satisfaction.
• Incentives to homeowners. Some, though definately not all, lenders will approve a closing cost credit to the seller at close. This is unpredictable and heavily dependent on the investor on the loan.
• If the first short sale fails, you can try again. Not all short sales work out the first time. In a traditional short sale it is pretty easy (if sometimes time consuming) to just try again if the short sale does not work out the first time for some reason.

Lenders in-house traditional short sale program CONS:

• Unpredictable terms of approval. When getting started there will be no guarantees that the lender will completely forgive the remaining debt when approving a short payoff. It has though been my experience that MOST of the time lenders will completely settle for the short payoff, and lately some of the even more stubborn lenders are moving towards debt forgiveness. It has also been my experience that even when a lender WILL NOT completely forgive the remaining debt, the odds of them pursuing that debt later are low. I have YET to see any of my former short sellers pursued for a deficiency judgement, even when the lender did reserve the option to do so.
• You may not get a cash incentive. Thats right - you may not get any cash back from your short sale.

HAFA short sale PROS:

• Full debt forgiveness is guaranteed. If you do manage to make it to the end of the program and graduate with a closed sale, your lender will never be able to pursue you for the remaining debt.
• $3,000 incentive. Assuming that by the time your short sale gets closed, other fees left uncovered by HAFA approval ( back taxes, attorney fees, credits, etc) does not eat up your $3,000 incentive, you may in fact walk away with the $3,000.

HAFA short sale CONS:

• The odds of making it through the program are very slim in reality. The program was designed to help America's 11 million underwater homeowners. As of January 2011 ( 10 months into the program ), just 661 people have been helped by the program.
• HAFA can take a very, very long time. It will take years before HAFA is integrated into the system and the bugs are worked out. From my experience with local Connecticut home sellers, getting approval for the program takes an average of 6-9 months minimum. (New guidelines promise to shorten this, but the new guidelines do not apply to Fannie Mae and Freddie Mac -  who own most loans)
• HAFA appraisals are often unrealistic. In order to determine what terms will be approved, HAFA will need an appraisal of your home. The problem I have noticed is that especially with HAFA these appraisals come in too high. Also, because of the long timelines involved, by the time the approval is issued the appraisal is too old to be relevant. This leaves an approval letter that can never be met.
• HAFA terms of approval are often unreachable and have zero flexibility. HAFA is very strict on their terms and allowable payouts to other lienholders. If there are any other liens against the property - including second mortgages, sewer liens, judgement liens etc, the odds of getting  a HAFA approval letter to satisfy everyone are slim to none.
• You may never see that $3,000 after all. Since it takes forever to get a HAFA approval and because their terms are so ridiculously tight, odds are you'll end up paying some or all of the $3,000 back in to the sale to satisfy all the fees involved.
• By agreeing to HAFA, you agree to voluntarily foreclose if the HAFA short sale approval letter can't be met. So in addition to the long timeline, difficult to satisfy approval, you've also now signed up for a deed in lieu of foreclosure if it doesnt work out.

Think hard before choosing HAFA!