You finally find the home of your dreams and apply for a mortgage loan. But those dreams quickly come crashing down when you are unable to repay your loan amount. You are on the verge of a foreclosure when you begin hearing about a short sale.
Should you take this route or not? Let’s talk about why, when, and how you should decide.
What is a short sale exactly?
Most of us don’t have enough money to pay cash for a house upfront. This is why we apply for a mortgage. You contact a bank and take out the mortgage loan with the understanding you will make timely payments on a monthly basis for 15 or 30 years. But life happens and suddenly you become financially distressed.
This is where the option to make a short sale comes into play. Homeowners who can’t afford to make payments can persuade the lender to accept less than it is owed. The homeowners have to jump through hoops to prove their case, but a short sale allows them to hire a real estate agent and find a buyer. The lender will get less than it is owed, but won’t have the hassles of legally pursuing a foreclosure or of owning a foreclosed property.
When should you opt for a short sale?
- If you cannot refinance or get a modification on your mortgage.
- You are overwhelmed by the hardships.
- You cannot pay your mortgage payments and have to leave.
- Your debt is more than your house is worth.
- You cannot sell your house for a price that covers your mortgage.
Benefits of a short sale
Short sales are not uncommon because they can be beneficial for financially distressed homeowners, lenders, and for buyers as well. Here are some of the fundamental benefits of a short sale.
1. Lenders can minimize the damage
Foreclosure is not cheap. Lenders that go that route have foreclosure and eviction procedure costs, inspections, attorney fees, delays, etc. Lenders can save approximately 25% to 35% of the cost of a foreclosure by agreeing to a short sale instead.
As a general rule, lenders don’t prefer holding unsuccessful loans in their portfolios. A foreclosed property that fails to sell becomes a non-performing asset. On top of that, the lender has to pay for all the maintenance, insurance, taxes, and repairs. Lenders can mitigate the loss by opting for a short sale.
2. A short sale saves money
According to the U.S. Congress Joint Economic Committee, if you are a homeowner who goes through foreclosure, you will lose over $7,500 on average. By contrast, a short sale could meant a $200,000 home is sold for $175,000, and a homeowner likely will not have to pay the $25,000 difference.
3. Good for the housing market
Because of the decreasing number of foreclosures in the country, the housing market has a limited supply of under-priced homes, which means a better market for homes being sold short.
4. Less stressful for homeowners
Needless to say, every real-estate sale because of financial distress is stressful. However, a short sale can be less stressful than a foreclosure because the homeowner negotiates up front with the bank rather than allowing the legal process of foreclosure to unfold.
How to initiate a short sale?
1. Persuade the lender
Lenders won’t tolerate dishonesty. You need to have a legitimate reason, such as loss of a job, divorce, a health problem, etc. that has occurred since the lender made the loan.
A homeowner needs to have a responsible short-sale proposal. Remember that if someone else co-signed your loan, the bank might hold that person responsible rather than agreeing to a short sale. Contact a lender’s loss mitigation department and get an opinion from someone who has real authority.
2. Do not handle it yourself
Consult an attorney, a tax professional, and a real estate agent for the short sale process. Professionals in short-sales will have the authority needed to properly guide you through the proceedings.
3. Deciding on a price
Get your selling price as close as possible to the amount you owe the lender.
4. Finding a buyer and creating a proposal
Gather all documents, including medical bills, bank statements, pay stubs, a termination notice from your former job, or a divorce decree, etc. Then find the ideal buyer for your home.
5. Submitting the proposal
When you have all the documents in place, you can submit the buyer’s offer along with your proposal to the bank. You should submit your financial issues and a hardship letter that explains why you are unable to pay your mortgage.
Things to remember when opting for a short sale
- Although a short sale is better than a foreclosure, it still leaves a hit on your credit score.
- When you submit your short sale proposal, be cautious about giving away your financial situation, as a lender can ask that you pay the mortgage from your other assets.
- Consult with the Internal Revenue Service (IRS) if the short sale is approved by the lender to see if you need to pay taxes on the shortfall.
Are there any other options?
Before opting for a short sale, you should negotiate with your lender regarding any possible loan modifications. Likewise, you can inquire about private mortgage insurance (PMI), which can help you stay in your home while making timely payments.
Whatever the path you take, consult professionals, and get to know the process. Persuade the lender with compelling proof of your situation. Lenders won’t be thrilled with a foreclosure on your home either, so a short sale or a loan modification can be better for both parties.
We understand how stressful short sales and financial issues can be. Feel free to reach out to us today for options you may have.