The federal Home Affordable Foreclosure Alternatives program stopped accepting new applications on December 30, 2016, but the exit routes it created for underwater homeowners, short sales and deeds-in-lieu of foreclosure, are still widely available through Fannie Mae, Freddie Mac, FHA, and VA.1U.S. Department of the Treasury. Making Home Affordable If you’re behind on your mortgage now, you can’t apply to HAFA itself, but you can pursue the same alternatives through your loan’s current program.
What HAFA Was
HAFA was part of the Making Home Affordable initiative launched after the 2008 housing crisis. It served as a backstop for borrowers who couldn’t get a Home Affordable Modification Program loan modification or whose modification failed.2U.S. Government Publishing Office. Home Affordable Foreclosure Alternatives Program It gave borrowers two structured ways out: sell the home for less than they owed, or transfer the deed back to the lender. In either case, the servicer accepted the outcome as full satisfaction of the debt and could not chase the borrower for the shortfall. That mandatory deficiency waiver was HAFA’s signature protection, along with a relocation payment to help cover moving costs.
The specific program is gone, but its two exit paths have become the standard playbook for resolving unaffordable mortgages without a foreclosure judgment.
The Two Exit Paths
Short Sale
In a short sale, you list the house at current market value even though the sale won’t cover the mortgage balance. A real estate agent handles it like any other listing, but the servicer has to approve the price and terms before closing because the servicer is the one taking the loss. Servicers typically issue a short sale agreement setting an approved list price and a marketing period, often 120 days. Closing costs, the real estate commission, title work, transfer taxes, and recording fees come out of the sale proceeds rather than your pocket.
Deed-in-Lieu of Foreclosure
A deed-in-lieu is simpler. You voluntarily transfer ownership of the property to the lender, and the lender cancels the mortgage. No listing, no buyer, no price negotiation. The catch is that the property generally has to be in reasonable condition and free of other liens. If you have a second mortgage, a home equity line of credit, or a tax lien, the primary lender can’t take clear title until those are resolved. Servicers often treat a deed-in-lieu as a fallback after a short sale attempt hasn’t produced a buyer. The FHA loss mitigation sequence, for example, requires servicers to attempt a pre-foreclosure sale before a deed-in-lieu.3U.S. Department of Housing and Urban Development. FHA Single Family Housing Policy Handbook
The Programs That Replaced HAFA
Fannie Mae and Freddie Mac
If Fannie Mae or Freddie Mac owns or guarantees your loan, your servicer follows short sale and deed-in-lieu guidelines that closely track HAFA’s structure. Fannie Mae evaluates borrowers based on delinquency status: borrowers less than 90 days delinquent must submit a complete Borrower Response Package, while those more than 18 months delinquent can be evaluated without one. The servicer also decides whether you should contribute cash toward the deficiency. If your non-retirement cash reserves exceed $10,000, or your housing costs are 40% or less of your income, expect a contribution request. Borrowers whose principal residence secures the loan are entitled to a relocation incentive, and payments to subordinate lienholders from the sale proceeds are capped at $6,000 in aggregate.4Fannie Mae. Fannie Mae Short Sale
FHA Pre-Foreclosure Sale Program
If your mortgage is FHA-insured, the Pre-Foreclosure Sale program lets you sell for less than the outstanding balance. The property must be your principal residence, and you have to demonstrate an eligible hardship such as income loss or increased expenses beyond your control. The home is appraised at as-is fair market value, and the sale must be arm’s length. You must vacate by the sale date and leave the property broom-clean. A relocation incentive payment may be available.5U.S. Department of Housing and Urban Development. Pre-Foreclosure Sale (PFS) Program
VA-Guaranteed Loans
Veterans with VA-backed mortgages can pursue either a short sale or a deed-in-lieu. The VA treats both similarly for guaranty entitlement purposes. If the VA pays a claim on the loan, your available entitlement is reduced by the loss amount. You can still obtain a new VA loan using second-tier entitlement, though a down payment may be required depending on the loan amount. Veterans who repay the VA’s loss in full can request a one-time restoration of full entitlement.
How to Apply
Whichever program covers your loan, start by contacting your servicer’s loss mitigation department. The standard intake form is the Mortgage Assistance Application, Fannie Mae/Freddie Mac Form 710, used by both agencies for borrowers requesting help.6Federal Housing Finance Agency. Mortgage Assistance Application FHA and VA servicers use their own similar forms.
The documents you’ll typically need to submit:
- Recent pay stubs and any Social Security, disability, or other household income documentation
- Federal tax returns from the previous two years
- Bank statements for all household accounts showing current liquid assets
- A written hardship statement describing what caused the default, such as job loss, divorce, medical expenses, or military relocation
Submit through the servicer’s secure portal or by certified mail with a return receipt. Keep proof of submission, because federal timelines start when the servicer receives your package.
Protections While Your Application Is Under Review
Federal mortgage servicing rules under Regulation X give you real protections once your application is in. Within five business days of receiving it, the servicer must send written notice stating whether the application is complete or incomplete. If it’s incomplete, the notice must identify exactly what’s missing and give you a reasonable deadline to supply it.7eCFR. 12 CFR Part 1024 Subpart C – Mortgage Servicing
Once the servicer has a complete application received at least 37 days before any scheduled foreclosure sale, they must evaluate you for all available loss mitigation options and issue a written determination within 30 days.7eCFR. 12 CFR Part 1024 Subpart C – Mortgage Servicing This is where dual-tracking limits kick in. Current regulations restrict servicers from advancing foreclosure while a complete loss mitigation application is under review, with nuances tied to timing and whether the application is your first. Getting a complete application in early gives you the strongest protection.
Plan on roughly 60 to 90 days from a complete application to a final decision. A short sale runs longer than that because marketing, buyer negotiations, and closing add months. A deed-in-lieu resolves faster because there is no third-party buyer.
Second Mortgages and Other Liens
Junior liens are where short sales most often fall apart. A second mortgage or HELOC lender holds its own lien on the property and has to release it for the sale to close. The first mortgage gets paid from the sale proceeds first, which usually leaves little or nothing for the junior lender, so junior lenders don’t always cooperate.
Fannie Mae caps aggregate payments to subordinate lienholders at $6,000 from the sale proceeds.4Fannie Mae. Fannie Mae Short Sale If your second mortgage balance is $50,000, that $6,000 is a steep discount. Some junior lenders take the payment and release the lien. Others authorize the sale but reserve the right to pursue you later through a promissory note or separate repayment agreement. Whether they can actually collect depends on state law on deficiency judgments, which varies significantly. If you have junior liens, get the terms in writing before closing. A short sale that resolves the first mortgage but leaves you exposed to a $40,000 deficiency claim from the second lender hasn’t fixed the problem.
Tax Consequences of Forgiven Debt
When a lender forgives part of your mortgage balance, the IRS generally treats the forgiven amount as taxable income. If the cancelled debt is $600 or more, the lender must file Form 1099-C reporting the cancellation.8Internal Revenue Service. About Form 1099-C, Cancellation of Debt You must report the correct taxable amount on your return whether or not the form arrives. The treatment differs depending on whether your loan is recourse or nonrecourse; consult IRS Publication 4681 or a tax professional for the calculation that applies to you.9Internal Revenue Service. Topic No. 431, Canceled Debt – Is It Taxable or Not?
Two exclusions matter most to homeowners.
The Insolvency Exclusion
If your total liabilities exceeded the fair market value of all your assets immediately before the cancellation, you were insolvent and can exclude cancelled debt from income up to the amount of that insolvency.10Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness For example, if your liabilities exceeded your assets by $30,000 and $25,000 of debt was cancelled, the full $25,000 is excludable. If $40,000 was cancelled, only $30,000 is excludable and the remaining $10,000 counts as income. Claim the exclusion by filing Form 982 with your return and checking the insolvency box.11Internal Revenue Service. Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments Many homeowners going through a short sale are insolvent by definition, since the home is worth less than the mortgage. This exclusion is permanent.
The Qualified Principal Residence Exclusion
A separate exclusion allows homeowners to exclude up to $750,000 ($375,000 if married filing separately) of cancelled mortgage debt on a principal residence, provided the debt was used to buy, build, or substantially improve the home. Under 26 U.S.C. 108, the exclusion applies to discharges occurring before January 1, 2026, or to discharges subject to a written arrangement entered into before that date.10Office of the Law Revision Counsel. 26 USC 108 – Income From Discharge of Indebtedness Congress has extended this provision several times since 2007, but as the statute currently reads, new arrangements entered into during 2026 are not covered. Check for legislative updates. If you claim it, your home’s tax basis is reduced by the excluded amount.11Internal Revenue Service. Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments
Credit and Waiting Periods for a New Mortgage
A short sale or deed-in-lieu will damage your credit, but less than a completed foreclosure. Both events stay on your credit report for up to seven years from the completion date. Expect a substantial score drop in the first year or two that eases as you rebuild.
The more practical question is how long before you can qualify for a new mortgage:
- Conventional loans through Fannie Mae: four years from the completion date of a short sale or deed-in-lieu, dropping to two years with documented extenuating circumstances like a job loss or serious medical event.12Fannie Mae. Significant Derogatory Credit Events – Waiting Periods and Re-Establishing Credit
- FHA loans: generally three years, sometimes sooner with extenuating circumstances.
- VA loans: two years from the deed-in-lieu completion date, though individual lenders may impose overlays requiring three to four years.
These waits are considerably shorter than the seven-year waiting period typically required after a foreclosure for a conventional loan. That difference alone is why the short sale and deed-in-lieu options are worth pursuing even when the process feels slow. During the waiting period, the most useful thing you can do is build a clean record of on-time payments on other accounts, so a future lender sees the hardship as a one-time event rather than a pattern.