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The 3-Payment Plan

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Posted On: 12/07/2011

QUESTION:

In a short sale where the financing was FHA-insured, is the borrower first required to miss three payments? This advice was given to me by a lender before it would allow a short sale to go forward.

ANSWER:

We sent this question over to HUD and received this response: “The information is incorrect. Under the code of federal regulations 24 CFR 203.370 (c) 2 and section 204 of the National Housing Act the loan must be in default at the time the short sale transaction closes for HUD to legally pay a claim (31+ days). This does not preclude the servicer from processing the short sale request with the loan current if the borrower and property meet all the short sale requirements and close the transaction with the loan one month delinquent.”

To suggest that a borrower must miss three payments that could otherwise be made does several things. First, it means that the borrower’s credit will be seriously downgraded – even if a short sale is not completed. Second, it sets a foreclosure in motion and with it additional borrower costs and fees. Third, it puts the lender in the position of suggesting the encouragement of default, a huge no-no in the lending business. Fourth, in some jurisdictions it may set up the borrower for a “deficiency” judgment after the transaction, a suit by the lender to get back its money and fees.

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If the loan is current and the borrower needs to move the best option may be to rent the property. While home values have been falling rental rates have generally held steady or increased in most areas.

Whenever a lender or “foreclosure rescue specialist” suggests deliberately missing payments borrowers should immediately ask for assistance from an attorney or a community housing organization. Pro bono legal services may be available through law schools and bar associations. State attorneys general also may be able to suggest sources of help.

Peter G. Miller is the author of The Common-Sense Mortgage and a veteran real estate columnist. Have a question? Please write to peter@ctwfeatures.com.

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