Short Sales - The Long and the Short

 Short Sales - The Long and the Short

Hey, it happens. You made a good plan, bought a good house and had a good job. But life has a way of disrupting our plans sometimes. You're not alone though. Did you know that according to CoreLogic 11.1 million homeowners are also struggling to meet their monthly mortgage payments?

Should you find yourself having difficulty making your monthly mortgage payments, the small bit of good news is that there are many options that will allow you to work out of a tough spot. And, some of these options can enable you to better manage your credit rating – which will be important in the future when you are ready to buy a new home or need credit.

One common option you've probably heard about is a short sale. What is a short sale? A short sale occurs when a homeowner sells a home for less than they owe or what it is currently worth. Their lender permits the sale – or in some cases may purchase the home from the borrower – and essentially forgives the lost value.

For example, let's say you have an existing mortgage of $300,000, but the house is only worth $250,000. After getting approval from your lender, you put your house up for sale at $250,000. A buyer comes along and makes an offer for $235,000. The bank approves
the offer and accepts it as full payment of your loan. You no longer face your previous mortgage obligation and can move on to the next chapter in your life.

Do I qualify for a short sale?

If you have tried re-negotiating your mortgage terms, but still feel uncomfortable with the cost of your monthly payments, a short sale can be a great alternative. Or, if you have been unable to pay your mortgage for the past 90 days, and have received a Notice of
Default, you may also be a good candidate for a short sale.

When appealing for a short sale, lenders typically suggest homeowners meet three simple requirements, including:

  1. A Financial Hardship – A financial hardship is a circumstance or financial issue that will hurt your ability to make your mortgage payments on time. Some examples of financial hardships include: the loss of a job or income; relocation; illness; divorce or death.
  2. Insolvency – Insolvency occurs when you owe more on your house than what you have in available cash or assets. You do not, however, need to be completely out of cash to be considered insolvent (having some cash in the bank for day-to-day living expenses will not disqualify from obtaining a short sale). Rather, insolvency means that over a period of time the price of your loan will eventually exceed the amount of savings in your account, making you unable to meet your monthly payments.
  3. A Monthly Shortfall – To demonstrate that you can no longer afford your current mortgage, lenders will often request to see proof of your monthly shortfalls. Many homeowners submit their financial details to further illustrate their current hardships.

Simply put, add up your monthly expenses and compare that to your monthly income. If you can't pay your bills or it's clear that you will have difficulty doing so in the near future, then you have likely met short fall eligibility.

Why should you consider a short sale?

If you are at risk of defaulting on your mortgage, than a short sale might be a good option to avoid a foreclosure. A short sale does impact your credit rating, but it won't hurt your credit the way a foreclosure does. You also avoid a drawn-out legal process, and you get to regain control of your finances faster and move on with your life.

Some short sale benefits include:

  • Your credit score will typically only suffer a 100 point drop, at most.
  • If you continue to maintain good credit after your short sale, you may be eligible for a new home loan in as little as 2 years.
  • The short sale will closely resemble a regular sale, potentially allowing you to avoid the negative perception of a foreclosure.
  • You will work closely with all involved professionals, eliminating the room for scam artists.

Why might I not want to choose a short sale?

With so many Americans navigating though the rough housing market, there are more solutions and sources of help than ever before. Depending on your current lender and other eligibility factors, you might be able to refinance, modify your loan to lower your payments or even, in some cases, receive a principal reduction, which reduces the amount you owe.

So, before committing to any option, be sure to educate yourself and make the best decision for your specific situation.

How do I get started?

While the short sale process is generally less complicated than a foreclosure proceeding, it can still be a little confusing. Therefore, it's important that you contact your mortgage lender and real estate agent for help. These professionals can get you the short sale information, will help guide you through the short sale process, and will ensure all involved parties get the best deal possible.