In life, you may sometimes find yourself in a crisis that is beyond your wildest imagination. Events like a sudden illness, divorce, job loss or some major unanticipated expenditure can put your finances into total disarray. These are traumatic times in themselves, but the financial impact and the inability to meet your commitments make them a lot worse. Bills and mortgages still have to be paid and tough times often call for some tough measures.
If you can’t afford your mortgage, it may be better to sell the house and move into a rented home. Selling your home may also become necessary if you are relocating due to a job change. If the property is an investment and prices are crashing, it is better to sell quickly and cut your losses unless you have the holding power to ride the storm and wait for prices to come up again. There are many possible scenarios in which it becomes necessary to sell a home quickly. This is easier said than done, especially in difficult market conditions.
Sometimes the market conditions are so bad that you owe the lender more money than what your home is worth. Many people found themselves in this situation at the height of the recent housing market crisis. In fact, some people owed their lenders almost twice what their home was worth. If you can’t afford to pay your mortgage any longer, foreclosure and short sales are two possible exit options before you. With either option, you lose the home and the money you invested in it, but a short sale is preferable because it causes less damage to your credit rating.
The basics of short sales:
A short sale is a distress sale with the approval of the lender. The lender allows you to sell the property for less than what you owe on the mortgage. After a successful short sale, the lender will usually waive the shortfall. However, this is not guaranteed unless it is agreed in writing by the lender or the property is located in a state where the law forbids the lender from recovering the deficit. In the US, this law is currently in force in 12 states.
Lenders incur losses in short sales. Hence, they will not approve an application unless they are convinced that there is absolutely no hope of recovering the entire outstanding. Most lenders will not even consider a short sale application unless you are already in default and several months of mortgage payments are overdue. It may also become legally impossible for a lender to approve a short sale if you have filed for bankruptcy.
Call 1-800-805-8354 to connect with a Short Sale Specialist in your area. We have real estate agents who know short sales in your area.
To prove your eligibility, you have to convince your lender that you are in a financial crisis with no possibility of any significant improvement in the near future. You must also show that the market value of your home is less than your mortgage balance. Some lenders may consider a short sale even if you are not in default as long as you convince them that you will soon be in default due to reasons beyond your control.
There is no guarantee that the lender will approve your short sale application. Your chances of getting an approval are much better if you already have a buyer who is ready to buy the property and has the money or a pre-approved loan to pay for it. Without a confirmed offer and a large earnest deposit to back it up, it can become difficult to obtain an approval.
Why a short sale is better than foreclosure:
The main advantage of a short sale over foreclosure is its lower impact on your credit rating. A foreclosure might set your credit score back by about 250 points and it will remain on your credit report for a number of years. In the case of a short sale, the hit on your credit score could be around 100 points and the impact on your credit report is far less damaging. You can expect to qualify for a new loan at reasonable interest rates within two years after a successful short sale. In the case of foreclosure, this can take up to seven years.
(*Please consult with your CPA on actual credit impact as these are “general” estimations)
The other disadvantage of foreclosure is that depending on the jurisdiction, the lender may be able to pursue a deficiency judgment. In the case of short sales, the deficit is usually waived. It is, however, important to get clarity on this aspect in writing from the lender before you go ahead with the transaction.
Most lenders prefer short sales over the long and tedious foreclosure process. Despite this, many short sale attempts fail even after the lender has given the approval. For a successful short sale, speed is critical. Things become easier and your chances of success are much better if you take the help of a real estate agent who is familiar with short sales.
Curious if you have enough equity to sell, or you might be facing a short sale? Call us at 1-800-805-8354 to discuss your situation or use our 15 second home value estimator to get an idea of where you might be today.