Real Estate Insights

The first thing to remember is that a short sale should be a last alternative to foreclosure, allowing you to sell your home if you owe more than your home’s value, but still ends in a similar outcome – losing your home. A short sale can definitely provide a benefit to the underwater homeowner looking to avoid a foreclosure on their record by selling their home before the bank forecloses, but before you rush down that path it is important to understand that other options may exist that could help you keep your home.

Are there other options available to me that may help me keep my home?

Absolutely, and this is the most important thing that anyone considering a short sale must understand. There are more foreclosure alternatives available today to distressed homeowner’s than ever before. If you have any interest in keeping your home then you should look into all of the following before making a final decision to sell:

Refinance Programs – Most refinancing programs will require homeowners to be current on their mortgage payments; be able to prove valid employment and adequate incomes; and have enough equity remaining in their homes to qualify. There are some government sponsored refinancing programs being offered (through Making Home Affordable – see “Homeowner Resources” section at end of Guide) that can assist even those who do not meet all of these requirements.

Loan Modification Programs – If refinancing is out of the question due to a financial hardship (such as loss of employment), or if you find that you have already fallen behind on your mortgage payments, then a loan modification or re-payment plan would be the next alternative to look into. Many lenders are more than willing to modify their borrower’s home mortgages as long as they would reasonably benefit from lowered payments or even principal reductions. But then again, not all lenders will offer their borrowers such programs, and not all distressed homeowners can qualify.

Loan Forbearance – Often time’s lenders can offer borrowers a limited amount of time to stop making payments in the hopes that the borrower will be able to get back on their feet and resume payments at the end of the forbearance period

Rent the Property – If the mortgage payments are low enough and the rental market is strong enough, then it could make sense to move out of the property and then rent it to a tenant. But property management comes with additional expenses and liabilities that should be discussed with competent real estate professionals.

Bankruptcy – Often misperceived as the “fix-all” solution for financial hardships, bankruptcy may or may not allow you to keep your home. If the homeowner has non-mortgage debts that cause a shortfall of paying their mortgage payments and a personal bankruptcy will eliminate these debts, this may be a viable solution. But, if you don’t have any equity remaining in your property and you cannot make the mortgage payments or reinstate your mortgage, then a bankruptcy will not save your home, it may delay the foreclosure process by weeks or even months, but it will not stop the process (it will also ruin your credit and can only be declared once every 7 years).

When do you know you’re ready for a Short Sale?

If all other options fail and keeping your home is not an option then maybe it’s time that you looked into a short sale as an alternative to foreclosure. You can bet on one thing during the foreclosure process, your lender will NOT continue to stall the foreclosure process once started, and if you are not working with them on one of the options above, or if your lender has already turned you down for these options, then it may be time to seek assistance from a local real estate professional knowledgeable in short sale transactions.

While not always the case, underwater sellers who have listed their homes for short sale may have missed mortgage payments and may not be able to financially afford their home any longer. Perhaps an interest rate adjustment has made the mortgage payment too expensive or their interest-only adjustable-rate-mortgage (ARM) has now begun to incorporate additional payments of principal. Or perhaps the homeowner has lost a substantial source of income, suffered a financial crisis, or other circumstance that has created difficulty for the homeowner to repay their mortgage.

Whatever the case may be, homeowners must be able to prove to their mortgage lenders that they are currently suffering from or will inevitably suffer from a viable financial hardship…and the homeowner’s lenders must see evidence of such hardship. Without a hardship it may be improbable that a lender will allow a short sale over a foreclosure, although it is always up to the lender to decide, and lenders usually do what’s financially in their own best interests.

It may take more paperwork to get out of your mortgage than it did when you got into your mortgage! A short sale requires much paperwork, preparation and patience on behalf of both the seller (borrower) as well as the buyer. Typically, before applying for a short sale, the seller must have all their paper work prepared and ready to present to their lender along with a valid purchase agreement with a fully able buyer. The buyer of a short sale must also be prepared to wait patiently for the seller to receive such required lender approval and, once approved, be ready to act in a protracted time period to conclude the purchase of the property.

Are there downsides to a Short Sale?

In short, a short sale is an alternative to foreclosure and nothing more than negotiating with lien holders a payoff for less than what they are owed, or rather a sale of a debt, generally on a piece of real estate, short of the full debt amount. A short sale does not extinguish the remaining balance unless settlement by the seller’s lender(s) has been clearly indicated on the acceptance of the short payoff. And, although the lender may consider the loan satisfied through a short sale, the IRS may look upon any such forgiven debt as income (by issuance of a 1099-C) and the seller could be responsible for paying income taxes (both Federal and State) on any such forgiven debt (homeowners should seek professional tax guidance from certified professionals).

At least with short sales, there is usually always a little room for negotiation. Although different from foreclosure, in which there is no negotiation of terms available, short sales offer the seller the chance to negotiate the terms of how a lender may handle any deficiency balances as well as how the short sale may be reported on their credit report. These negotiations may come at an additional cost to the homeowner, in the form of cash contributions from the seller at closing or even requiring a promissory, whatever the case may be, the short sale process allows the seller options that a foreclosure will not provide.

Where to Begin?

Simply listing your home “for sale” when you owe more on your mortgage(s) than the current market value of your home is not an as easy task, nor is it always a guaranteed solution. Careful thought, consideration and planning should be given to the task of selling your home versus simply walking away when you are faced with being upside-down in your mortgage and wanting to move. There must be a REASON for your mortgage holders to allow a short sale.

It is important to understand that not all lenders will allow short sales or accept discounted payoffs, especially if it would make more financial sense to foreclose; moreover, not all sellers nor all properties qualify for short sales. As such, homeowners contemplating a short sale should learn more about your Foreclosure and Short Sale Resources before proceeding with the sale of their home.