Do I Have to Be Late on My Bad Credit Mortgage to Be Approved for a Short Sale?

By Gina Pogol
Mortgage Credit Problems Columnist

Bruce Asks: Dear Gina, I have a bad credit mortgage and my interest rate is going to over 10%. I always planned to clean up my credit and refinance but now my home is worth less than my mortgage balance. I can't refinance, but I won't be able to make the payment either. Will my lender approve a short sale or do I have to miss a few payments first?

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Gina Says:

Dear Bruce,

Every lender is different when it comes to short sales. But a new program may be able to help you. It's part of Making Home Affordable and it's called the Home Affordable Foreclosure Alternative (HAFA) program. It goes into effect next month. If your lender participates in Making Home Affordable, you may be able to get a short sale done much more easily than you could have before.

What Does HAFA Do?

HAFA is for borrowers who are eligible for the Home Affordable Modification Program (HAMP) but who either don't qualify for a loan mod or who prefer to do a short sale or offer a deed-in-lieu of foreclosure instead. You have to apply for HAMP with your lender (Who knows? Maybe You can get a mortgage modification to 2% and keep your home) and if you are eligible, you may be able to proceed with a short sale. HAFA has created a standard procedure for short sales that every Making Home Affordble participating lender has to abide by. It takes the guesswork out of the deal. There are standard procedures and deadlines for you and for the lender. In addition, there are other benefits:

  • You get at least 120 days to market your home without threat of foreclosure
  • You could get a reduced mortgage payment while you have your home for sale
  • Your lender must accept the sale proceeds as payment-in-full
  • You get $1,500 to relocate after the sale
  • If you have a second mortgage, your creditor can get up to $3,000 to release its claim

If you're eligible for HAMP, you have to document that making your payments is a hardship and could cause you to be at risk of foreclosure. Try using a mortgage calculator to see if your upcoming interest rate increase qualifies. Put in the loan balance, the new interest rate, and the remaining term of your mortgage, and see what your new payment will be. If it doesn't include property taxes and insurance (many bad credit lenders don't impound these items), make sure you add them and homeowners association dues too. Then see if this total housing payment exceeds 31% of your gross monthly income. Just multiply your gross income by .31. If your house payment is more, you may qualify for a mortgage modification to an affordable payment or a streamlined short sale.

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