A short sale, according to Freddie Mac, “occurs when a property is sold at a price lower than the amount the homeowner owes on the mortgage, and the homeowner’s mortgage lender(s) agrees to the “short” payoff.” How clinical. Let’s try a real-life scenario.
Mary is a single mom with three children, facing foreclosure after she lost her job as a dental assistant. From A-Z, she has done everything she can to take care of her children and herself but she feels backed into a corner. It doesn’t seem like she can comfortably move on with her life without getting a huge hit to her credit score, damaging her ability to buy or rent a new home, get a credit card, get a car lease. Mary is a woman who gets things done so she reaches out to our friend Google, and gets directed to more information about options available to her. Yes, Google, she is facing financial setbacks, and yes, she does require financial assistance from the bank. In fact, Mary thinks she might need to end her mortgage contract with the hope that she can pay less than her originally owed amount.
At this point, Mary can either call the mortgage lender and negotiate with them on her own, or she can give permission to a private party to do so for her. After all, even if a homeowners’ attempts to reconcile with the bank have failed in the past, the third party should still be considered, because oftentimes they have more leverage than the homeowners themselves. There is a catch. Mary will lose her home and walk away with nothing from the sale. However, her credit will be less affected and she will have avoided a costly trial. After all, the average person conducting a short sale is able to buy another home in 2-5 years. That is where we will leave Mary, thinking about the pros and cons of what will happen next.
The reason Mary would lose her home and walk away with nothing is because the bank would accept a lower payout than what was originally owed. Sometimes, moving expenses can be negotiated, but that is not necessarily something to rely on. The homeowner’s credit will still be affected, although the point loss won’t be as severe. According to How Stuff Works, “from a lender’s perspective, it’s better to recover a portion of a mortgage loan than to absorb a total loss,” so lenders will err on the side of the better outcome and work with the homeowner in most justifiable situations, meaning within a few years, Mary could own another home.
With short sales, there is also a possibility of dealing with deficiency judgments if they are not specifically addressed before the completion of a short sale. A deficiency judgment is when the bank comes after the homeowner for the portion of the loan they have not paid. Before you initiate a short sale, ensure you have in writing that your lender will not pursue a deficiency judgment. Finally, short sales are painfully slow, with paperwork stacking up over days, months, and weeks. It would be easier to allow a third-party service to deal with all of the paperwork, phone calls, and emails, secure in the knowledge that it would be a low-stress process.
There are four categories you have fall under in order to qualify for a short sale.
- The home’s value has dropped. The comparable homes in a neighborhood may significantly decrease and the amount you paid for your home may no longer be relevant. This is referred to as being “underwater.” This is a hard situation to recover from and usually takes a turn in the market to overcome completely, which could take a few years or even a decade.
- The seller has fallen on hard times. “Hard times” may include divorce, medical emergencies, death, unemployment, sudden illness, or bankruptcy but don’t typically include things like bad purchase decisions, unfriendly neighbors, buying another house, pregnancy, or simply wanting to move into an apartment.
- The mortgage is in, or near, default status. Regardless of whether the homeowner may be behind on one payment or six months worth of payments, you could qualify for a short sale.It’s important that you talk to your lender immediately when you determine you can no longer afford your mortgage. If it is a temporary situation, they may be willing to work with you to refinance your mortgage to account for the missing payments.
- The seller has no assets. As part of the short sale paperwork and process, the lender may request to see tax records and financial statements. If the homeowner has any assets, the lender may deny a short sale, under the assumption the homeowner has the ability to repay the rest of the mortgage. According to HomeBuying.About.com, “if the seller has cash in a savings account, owns other real estate, stocks, bonds or even IRA accounts, the lender will most likely determine that the seller has assets. However, the lender might discount the amount the seller is required to pay back.”
If you believe you could qualify for a short sale, reach out to your lender or reach out to us. We can probably help you or get you to people who can. After all, this isn’t a made-up scenario that you’re working with. This is your life, your health, and your happiness. We want to make everything as straightforward as we can.