Basics

• A short sale transaction involves the settlement of a mortgage account for less than what is owed to the lender. It must approve the terms of the short sale prior to releasing the lien. Borrowers must demonstrate a financial hardship to qualify. The number of short sales continues to rise as of mid-2011, according to Realtor.org. Delinquent real estate taxes and HOA dues may become liens on the property title. Liens require payment of the amount in arrears, plus any legal fees and penalties assessed, prior to transfer of title to the buyer.
  
  

Types

• Effective April 2010 through 2012, the Home Affordable Foreclosure Alternatives program is intended to streamline various aspects of the short sale process. Participating lenders must adhere to certain timelines and incentives to facilitate short sales. Mortgages insured by the Federal Housing Administration -- an agency within the United States Department of Housing and Urban Development, also qualify for short sale with lender approval. FHA loans compose approximately one-third of American mortgages. FHA and conventional loans require submission of a HUD-1 Settlement Statement, which must disclose all closing costs associated with the sale of a home, including prorated and delinquent taxes and HOA dues.
  
  

Identification

• The HAFA Request Form, which borrowers submit to the their lender when seeking short sale approval, contains program terms and conditions. It lists allowable costs that may be deducted from the gross sale price, which are paid by the lender on the seller's behalf. Such costs "must be reasonable and customary for the market," states the form. "Pro-rated real estate taxes" are allowed expenses; however, "assessments" and "association dues," remain the responsibility of the homeowner, as they are considered "property maintenance and expenses," according to HAFA. HUD's Preforeclosure Sales Program for FHA loans also identifies the closing costs a lender may pay. They include tax certificates (tax liens); real estate taxes to closing (prorated); and unpaid HOA dues.
  
  

Consideration

• Short sale programs have benchmark net proceed guidelines the lender adheres to in considering a short sale approval. The sale must yield net proceeds that are no less than a certain percentage of the home's appraised value. Ultimately, the net proceeds determine what flexibility the lender will exercise when deciding what to pay. Lenders may require borrowers to pay delinquent HOA dues if they are not yet liens, but may pay them once they become an assessment against the property. In general, the lender will pay delinquent taxes from short sale proceeds.