New incentives encourage short sales

05.15.09
By Sarah Beldo

So far, the Obama administration's mortgage relief program has helped 55,000 troubled homeowners avoid foreclosure - but there are many struggling borrowers who have little to no hope of ever paying back all they owe.

On Thursday, the government introduced new incentives aimed at making it easier for these homeowners to end their mortgage default problems.

Experts say those most likely to find relief from the new program include borrowers who are unemployed, have suffered a life-changing financial event or are significantly underwater with their mortgage - owing far more on their home loan than their property is worth.

In these cases, the homeowner may either opt for a "short sale" or decide to transfer the property title over to the lender, known as "deed in lieu of foreclosure."

With a short sale, the homeowner first gains their lender's permission to sell the property for whatever they can get for it, using the money to pay off as much of their mortgage as possible. Typically, the lender forgives the remaining balance.

However, the path to a short sale is not always easy. Lenders may not agree to it in the first place, while the process may take so long that the deal doesn't go through.

Yesterday, Treasury Secretary Timothy Geithner said that under the government's Making Home Affordable plan, mortgage servicers will get $1,000 as encouragement for completing a short sale or deed in lieu.

Meanwhile, borrowers will receive up to $1,500 to help them find a new place to live. And the Treasury will also give $1,000 to any second mortgage holders to help the process run smoothly.

Borrowers who are considering either of these options should know that a short sale or deed in lieu of foreclosure will damage your credit scores significantly, as will a foreclosure.

More Experts Articles | News Home | Discuss in our Forum

The path to a short sale is not always easy.