Short sell your home to avoid foreclosure
Are you in danger of losing your home? Protect your credit score with a short sale.
© fotag/Getty Images
If your adjustable-rate mortgage has reset to an interest rate you can't afford, you've experienced a major financial setback such as losing your job or if you must sell a house that is worth less than your mortgage, foreclosure may not be your only option.
A short sale can salvage your credit and help you avoid bankruptcy. For homeowners who are left with few remaining financial options, it may be worth a try.
In real estate, a short sale occurs when homeowners in financial distress sell their property for less than what is due on the mortgage. The buyer is a third party, not the bank, and all proceeds from the sale go to the lender. The lender forgives the difference or gets a deficiency judgment against the borrowers. This requires the borrowers to pay the lender all or part of the difference between the sale price and the original value of the mortgage. In some states, this difference must be forgiven, by law. (Bing: Which states?)
Alternatives to a short sale
Before resigning yourself to a short sale, talk to your lender about the possibility of a revised payment plan or loan modification. Either option may allow you to stay in your home and get back on your feet.
You also could stay in your home if you have private mortgage insurance. Many homeowners who purchased homes with less than 20% down were required to purchase PMI. If the PMI company thinks your current financial situation could turn around, it may advance funds to your lender to bring your payments up to date. Eventually, you must repay this advance.
If none of these options is possible, be prepared to do a lot of work to complete a short sale. While a foreclosure essentially lets you walk away from your home — albeit with grave consequences for your financial future, such declaring bankruptcy and destroying your credit — completing a short sale is labor-intensive. The payoff may be worth it, however.
Article continues below
Before you begin, try to understand your lender's perspective. The lender is not required to do a short sale and will complete one only at its discretion. Make sure that the source of your financial trouble is new, such as a health problem, job loss or a divorce. It should not be something you neglected to disclose when you applied for the loan. The lender won't sympathize with a dishonest borrower. If you think you were a victim of predatory lending, however, you could talk the lender into a short sale even if you have not had any financial catastrophes since buying the home.
- MSN Money: Banks pay homeowners to sell
Be aware of circumstances that may prevent the lender from wanting to do a short sale. Unfortunately, if you are not in default on your mortgage payments yet, the lender probably won't want to work with you, even if you see the thunderheads looming over your backyard. Also, if the lender thinks it can get more money from foreclosing on your home than from allowing a short sale, it could turn you down. Finally, if anyone has co-signed on your mortgage, the lender may want to hold that person responsible for payment rather than doing a short sale.
If you think your situation is ripe for a short sale, talk to a decision-maker at the bank. Don't just talk to a customer-service representative, who has no real authority. Immediately ask to speak with the lender's loss mitigation department. If you don't like what the first decision-maker says, try talking to another one on another day and see if you get a different answer. If the lender will consider a short sale, you're ready to move forward with creating the short-sale proposal and finding a buyer.
- On our blog, 'Listed': Bank to rent homes to former owners
Proceed with caution
At this point, you should consult a lawyer, a tax professional and a real-estate agent. While you may think that these high-priced professional services are the last thing you can afford, making a mistake while handling a complex short-sale transaction yourself could mean even more financial trouble. Professionals accustomed to dealing with short-sale transactions can give you guidance on how to pay them.
To put yourself in a more convincing position to complete a short sale, stop purchasing non-necessities. You don't want to look irresponsible to the lender when it reviews your short-sale proposal.
When setting an asking price, factor the cost of selling the property into the total amount of money you must receive. Of course, you want to sell the home for as close to the value of your mortgage as possible. But in a down market, there is bound to be a shortfall. In some states, even after a short sale, the bank expects you to pay back all or part of that shortfall, but at least this amount will be significantly less than what you owed on your mortgage.
Gather all of the documents you'll need to prove your financial hardship to the lender. These may include bank statements, medical bills, pay stubs, a termination notice from your former job or a divorce decree. It is up to you to come up with the short-sale proposal. Be aware that the lender ultimately must approve a short sale because it receives the proceeds. Your job is to find a buyer for your home.
Once you have a buyer and the necessary paperwork, you can submit the buyer's offer and your proposal to the bank. Along with the documentation of your financial status, your proposal should include a hardship letter explaining the circumstances that prevent you from making your mortgage payments. You want to make it as convincing as possible and protect your interests while also appealing to the bank.
Be careful about submitting your financial information to a lender. If it does not approve the short sale, it may use your financial information to try to get money out of you in foreclosure proceedings. If you still have cash assets, you may be expected to use them to continue making mortgage payments or to make up some of the shortfall between the sale price and the mortgage amount. A lawyer experienced in completing short sales can help you navigate the tricky details.
Prepare to wait
Because short sales can take longer than regular home sales because of the need for lender approval, they often fall through. Be prepared for the possibility of the buyer finding another property while waiting for your answer.
Also, be aware that a short sale can still affect your credit score. The months of mortgage payments you missed before the short sale can show up as delinquent payments on your credit report. It is up to the bank to decide what to report, so it's in your best interest to try to persuade it to not report your defaulted payments. The bank is more likely to be generous if you brought up your hardship before you were significantly behind. Although this is somewhat damaging to your credit, it is certainly less damaging than foreclosure.
If the short sale closes, you can breathe a sigh of relief and start over with a major financial burden off your back. You probably won't even have to pay taxes on the shortfall. Under the Mortgage Forgiveness Debt Relief Act of 2007, mortgage debt forgiven by lenders will not be taxable if the discharged debt is on your principal residence. This applies only to debts from 2007 to the end of this year, to a maximum about of $2 million. The amount of debt forgiven still must be reported on your income-tax return using Form 982. You should receive a Form 1099-C from your lender stating this amount. Find more information on the Internal Revenue Service website.
Not all lenders are willing to do short sales. Even when they are, short sales don't always close. They are, however, an excellent alternative to foreclosure and are worth trying to complete. Without the stains of foreclosure and bankruptcy on your credit report, you can get back on your feet much faster.
I will not do the work of a short-sale for a Mortgage Servicer and Mortgage Backer who refused to work with us when we called a year in advance...when it would have made a difference...for help.
Unfortunately, since 9/15/2008 the income took a big hit, but, NOPE, neither US Bank nor the Wisconsin Department of Veteran's Affairs can be bothered to work with a Veteran and family to help them stay in the house. Previous to the US Bank shenanigans to be sure to take even more advantage of us in the underwater, low equity loan they had mis-categorized in their computer system as a Conventional Loan, our Credit Rating was very good. We had never been late on a payment and were even a bit ahead on principal. None of this made a difference to them..nope "US Bank won't talk to you until you are three months in arrears," I was told. (They've since denied this, of course, even to the authorities...whoever those are...I'm sure they are all in cahoots.)
Of course, the Wisconsin Department of Veterans Affairs was no better. It took me begging my elected official for information from the WDVA to even have the WDVA bother to write us a letter. Then I had to go after them through the WI-Department of Justice for any more information on the mortgage. The WDVA was hiding out...for good reason...it turns out the mortgage they marketed to us in 2007 as a VA Mortgage only through the State of Wisconsin ISN'T a VA Mortgage but is, in fact, backed by a Bond Loan from Goldman Sachs! To my untrained eyes, these facts are no where in our mortgage paperwork. I smell fraud.
So, NO. I will not do the work of the short sale for these "insert swear word here."
The secret is this. There are two parts to the Foreclosure process...one involves punishing the customer by taking away their house and their credit ratings. The other involves pursuing the debt with delinquency notices. In our case, we would have to get a Delinquency Release letter from US Bank, Wisconsin Department of Veterans Affairs, AND Goldman Sachs.
So, Foreclosure & Bankruptcy & a blown credit rating it is. The Credit Rating is only useful if one feels the need to borrow money from a bank or credit union, and, since the credit rating always takes a hit to the negative, other than if one pays ones bills on time. So, who cares. "F" You US Bank. "F" You Wisconsin Department of Veterans Affairs and most of all "F" YOU GOLDMAN SACHS.
I had one short sale that was on the market for 18 months. He paid cash, $10k below asking price. The homeowner accepted. Then you have to bring this offer to the bank. they bring in an appraiser who told us the house was worth $30k over what it was listed for, so the deal fell through, because no one is going to offer $30k for a house over listing price if it didn't sell at that price point and was on the market for almost two years., so it's back on the market now for another 6 months and not selling, and the stupid bank continues to lose money month after month after month for their own stupidity.
Do yourselves all a favor., One, never take advice from irresponsible journalists for investopedia who didn't interview any realtors (I used to be a journalist as well and that's journalism 101) and second, talk to experienced and knowledgable realtors (there are many bad ones) to give you real estate advice!!!
"What this doesn't state is that if you do a short sale, you cannot get a mortgage for a new house for 7 YEARS."
That is so incorrect it makes my head hurt. You can get a FHA loan in 2 years after a short sale. You can get a FHA loan immediately after your credit is repaired if your short sale was due to extenuating circumstances (like a death of a spouse or severe illness).
Talk to a professional folks. 90% of these comments are by fear-mongering idiots.
I am a real estate agent in one of the worst markets in the US -- Las Vegas. My wife and I handle short sales as do many others in this market. If you want to talk about upside-down, try a $140k mortgage with a $35k fair market value. We have actually seen them close. Yes, it takes some time. How much time depends on many variables. How many loans are involved? Who are the investors? What are the investors' requirements for accepting a short sale? What is the borrower's hardship? The list can go on and on.
In many situations, the banks are not the culprits. They are only servicing the loan. If it is not one of their portfolio loans, the decision makers are the investors. They could be Fannie Mae, Freddie Mac, FHA, VA, or some other GSE, but not always.
The blame for this situation lies at many doorsteps. There were the congressmen who pushed to make housing available to everyone, the lenders who didn't adhere to reasonable lending practices, real estate agents who may not have had their clients' best interests in mind, and the borrowers who took on more debt than they should have. The housing bubble only allowed the situation to get completely out of control. So don't try to point fingers lest you see those pointing back at yourself.
Is a short sale the best alternative for a borrower? That depends on the borrower's situation. How do you find out? Consult with professionals who know what they are doing. Not every attorney, accountant, or real estate agent has the expertise or experience to handle short sale transactions.
Much of what I have seen in these comments consists of misinformation, a lack of understanding about short sales, and misplaced anger. If you expect the government to fix the situation, consider that it has created several programs to deal with the situation, none of which has worked. Also, think back a few months to all of the brouhaha about the debt limit. Then, think back to how our government has not been able or even attempted to live within its own means.
Had a buddy that went the short sale route at the direction of a realtor. The realtor did not even advise him to list the home at market price for a short period of time. Guess who made an offer the next day. It was a very good friend of the listing agent. The offer was taken to the bank and accepted. That was kind of fishy! I told him to expect the bill for the balance in addition to showing a foreclosure on his credit report. He did not believe me, and said he was free and clear. I doubt the bank was going to take a 40K hit! This guy let the realtor handle the whole process. I call it a conflict of interests!! The sad part here is that he recieved two significant raises in the last two years. I understand this when people lose their jobs/fall on hard times, but for someone who recieved a significant raise and still do this because they simply tought they shouldn't pay due to being upside down, is ridiculous. Oh well, I did say "HAD" a buddy.