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Should I Short Sale My Home?

We have a second home in a rental community and are not getting enough to make the payments. What happens with a short sale?

We have a second home in a rental community in Florida and we are not getting enough rentals to assist in making the payments. We have both lost our jobs and we are 60 and 66 in age. The value of this rental home is around $160,000 are loan is $195,000. We originally paid $260,000 for the townhouse. What happens with a short sale?

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Editor’s note: See the Bills.com resource Home Affordable Foreclosure Alternatives Program for an updated discussion of deeds in lieu of foreclosure and short sales.

Generally speaking, a short sale occurs when a homeowner who is behind on his or her mortgage payments, and who owes more on his home than it is currently worth, contacts the mortgage lender asking the lender to allow him to sell the home for less than the balance of the mortgage. For example, if you owe $100,000 on your mortgage, but are only able to sell your home for $80,000, you would need to have your mortgage lender agree ahead of time to allow the sale to proceed. In fact, there is little use in putting your home on the market until you, or your attorney, have spoken with your mortgage company’s loss mitigation department to discuss proceeding with a short sale.

Many lenders will authorize short sales in an attempt to prevent property from falling into foreclosure; however, some lenders will not allow short sales to proceed. Usually, no lender will authorize a short sale unless the borrower is already in arrears on his mortgage, as the lender will see this as evidence that the borrower can no longer afford the home. In addition, your mortgage lender’s loss mitigation team will probably want to see documentation of your income and assets to verify that a financial hardship exists and that you truly cannot afford the home.

If your mortgage lender approves a short sale, the next step is to find a buyer willing to pay a reasonable price for the property. Some people try to take advantage of individuals who are trying to conduct a short sale by offering significantly less than the home is worth, hoping that the owner will accept the offer out of desperation. Once an offer is made on the home, you will need to consult with your lender, and the lender will have final say-so in whether or not the sale can proceed at the offered amount. When first talking to the loss mitigation department, you may want to inquire as to what amount the mortgage lender considers reasonable so you can gauge what offers you can expect to have approved.

If you are successful in selling your home in a short sale, you may still be liable for the difference between the amount you owed on the mortgage and the amount of the sale, which is referred to as a deficiency balance. If you owe a deficiency balance, your lender may be able to pursue you for collection of the debt, depending on your state’s laws regarding deficiency balances on homes. Some states, such as California, do not allow for the collection of deficiency balances on purchase money loans. However, if you live in a state which does allow for the collection of deficiency balances, your creditor may be able to sue you and obtain a judgment for the amount owed. Many creditors do not pursue former homeowners for deficiency balances even in states where they are allowed to do so, preferring to use the loss as a tax write-off. I encourage you to discuss this with your mortgage holder and an experienced real-estate attorney prior to proceeding with a short sale. An experienced attorney should be able to advise you of your state’s laws and may also be able to assist you in negotiating with your mortgage lender.

In regards to your credit score, the negative credit impact of a short sale is generally significantly less than that of a foreclosure. A short sale will not appear as a foreclosure on your credit report, and therefore only the previous delinquency on your mortgage will appear. Also, I believe that most mortgage lenders report a mortgage that is paid through a short sale as being in a redemption status. While the delinquency and change of status on your mortgage loan will certainly lower your credit rating, from my experience, the negative impact is usually much less than the negative credit implications of an actual foreclosure. If you must choose between a short sale and allowing your home to go into foreclosure, from a credit perspective, a short sale is probably the wiser choice. Again, I encourage you to speak with an experienced real estate attorney to discuss the details of your situation to help you determine the best course of action in your circumstances.

To learn more about foreclosure, short sales, and other options available to homeowners struggling to meet their mortgage payments, I encourage you to visit the Bills.com mortgage page, as well as our blog’s mortgage Q&A index.

I hope that the information I have provided helps you Find. Learn. Save.

Best,

Bill

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2 Comments

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  • NL
    Jan, 2011
    nicole
    C/o Bridgeport, CT
    I hlive in CT and have been late w/my payments for the last couple of months due to lost of income. My mortgage company ahas refused payments and have told me that I my account is now in forclosure stats, but the foreclosure is on hold (no one at the office knows why it's on hold). I have yet to be served w/foreclosure papers. I've alrdy been approved for a loan modification last yr march 2009, but now it has become very difficult to keep up. The mortgage company has told me my income to debt ratio is too high to qualify for a loan repayment. and that i can either do a short sale or deed-in-lieu. which option is best for me considering I am already in the RED (foreclosure). Or should I just go bankrupt chapter 13?
    0 Votes

    • BA
      Jan, 2011
      Bill
      Speak to an attorney now about your options for either a Chapter 7 or 13 bankruptcy. Generally speaking, if the mortgage payments are so large that they cause you financial distress, and a modification is not enough to help, then consider a short sale or deed-in-lieu-of-foreclosure as your first options.
      0 Votes

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