Are you or someone you know having trouble paying a mortgage? You’re not alone. Millions of Americans are still grappling with the fallout from the recent recession. And for many, that means falling behind on mortgage payments.
If you’re starting to get behind on your mortgage or have already received a notice of default (NOD) –you need to take action. You can:
- Hustle — Come up with the cash to bring your mortgage current.
- Get a Loan Modification — Ask your lender to change the terms of your loan.
- Walk Away — Let your bank foreclose on the home.
- Attempt a Short Sale — Sell your home for less than you owe.
What Is a Short Sale?
A short sale occurs when proceeds from the sale of a home are less than what the seller owes on the property. Before pursuing a short sale, sellers (often with the help of a real estate agent) must negotiate with their lender(s) and get the lender(s) to agree to the sale of the property at fair market value even if that amount is less than what the homeowner owes.
Short sales prevent foreclosure, but are obviously pretty ugly themselves. They’ll still hurt your credit, and with a short sale, you run the risk of getting a tax bill for the difference between what you owe and what your house is sold for, depending on your state’s law. You should discuss this with your real estate professional or accountant.
With that in mind, why would anyone actually want to short sell their property? Often, a short sale is the lesser of several evils.
Considering the Alternatives
Before making the decision to short sell your property, it’s important to consider all of your options. If you are behind in your payments and expect future payments to be a struggle, you could let your home go into foreclosure by discontinuing all payments (walk away). Foreclosures can stay on your credit report up to ten years. Although a short sale will still impact your credit for many years, future prospective lenders and employers may look more favorably on a short sale than a foreclosure because you chose to help ameliorate the situation rather than just walk away.
Another option is a loan modification. Loan modifications may allow you to stay in your home, but may end up being an expensive and/or temporary fix. Loan mods may alter the loan type (for example, from an adjustable to fixed rate or vice versa) or extend the term of the loan (for example, from 30 to 40 years). Depending on the mod, you may get a lower monthly payment but end up paying more interest in the long-run or your lender may forgive your arrears but not lower your monthly payment, in which case you may be at risk to just fall behind again.
As an aside about loan modifications, NEVER pay a third-party to negotiate a loan modification for you. Some of these services are scams, especially if they require an up-front fee or ask that you make your mortgage payment to them instead of your lender. If you want to pursue a loan modification, either contact your lender directly or find a HUD Certified Housing Counselor in your area. These counselors are certified to provide free or low-cost advice on modifications and foreclosure avoidance.
Preparing for a Short Sale
To be considered for a short sale, you’ll need to submit a letter of hardship to your lender, explaining the challenges which have caused your financial difficulty. Truthfully explain loss of employment, family death, divorce, or medical expenses. Lenders will ask about your income and assets, such as stocks, bonds, savings accounts, money market accounts, or other real estate. Finally, many lenders will only consider approval if you are a month or more behind on your payments.
Financial institutions often require that there is a buyer in line ready to purchase the property. This is where the real estate professional can help. If the reason you can’t fully pay off the lender through the sale of your home is due to a drop in real estate values in your market, ask your real estate agent to prepare a comparative market analysis to give the lender data about recent sales of similar homes.
The process of selling your home short of what is owed to the bank can take up to nine months or more, depending on how quickly your real estate professional can find a seller and how well the bank communicates. You’ll begin by providing the necessary documents to the real estate professional such as W2s, pay stubs, mortgage information, bank statements, and the hardship letter. Then the agent will contact the lender and list the home for sale on the Multiple Listing Services (MLS). It is then your responsibility to keep your real estate agent informed of any changes in your financial status, and keep the house tidy, ready to be shown to potential buyers.
If you’re behind on your mortgage and considering a short, talk to a HUD housing counselor or a real estate attorney. She will help you analyze your financial future so you can find the solution which does the least damage. She can also refer you to a real estate agent who can put your house on the market to start the short sale process. As a final reminder, there are numerous scams dealing with loan medications and short sales out there, so be alert. You should never have to pay an up-front fee for a loan modification or to make a mortgage payment to anyone other than the mortgage company.