Is Short Sale an Option When You Can’t Repay Your Mortgage?

Bill House

A short sale happens when you sell your property for less than what you owe on your mortgage. It’s a sale where the proceeds fall short of your outstanding mortgage balance. But how is it an option for you or any other homeowner? And why do lenders agree to it?

Not all borrowers can religiously meet their monthly mortgage obligations. While foreclosure seems inevitable for some distressed homeowners, a short sale can be a better option.

Find out why here. Let’s help you find a lender.

The Truth Behind Short Sale

It happens that you owe $400,000 on your mortgage but you are struggling to pay it. As a result, you might have skipped a month or two of mortgage payments and can’t refinance to lower your payment.

In short, your mortgage debt is weighing you down and your current financial hardship makes staying in your home and continuing paying the mortgage not viable in the long run.

Against this backdrop, you might have to consider a short sale as an option when any of these elements is present:

1. You’re behind on your payments and you can’t refinance or ask for a loan modification. Streamed or standard refinances require a seasoning period, e.g. at least six months since the closing date of the existing loan. But the mortgage must be current and payments made during the given months prior to a refinance.

The same – of your loan being current — can be said in a loan modification. It is when a lender agrees to reduce your interest rate or change your term by permanently restructuring the loan. Thus, if you are behind on your mortgage payments, either of the two does not suit your current circumstances.

2. Financial hardship is present. Not all mortgage borrowers who failed to make their payments are negligent. They may be going through economic difficulties that render mortgage payments unaffordable now or later.

A financial hardship is a requirement for those seeking a loan modification, forbearance, or short sale.

3. You owe (on your mortgage) more than you own (or what your home is worth). This situation is called an underwater mortgage and the high loan-to-value ratio it carries deters a homeowner from refinancing his/her mortgage. HARP® or Home Affordable Refinance Program® has been created to address this issue on underwater mortgages. But it’s only for Fannie Mae or Freddie Mac loans.

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For this reason, a short sale is a likely option.

4. You can’t afford to stay in your home. You economic circumstances at this point make it difficult to make timely payments on your mortgage or could get worse in the coming days.

If you are willing to let go of your home and sell it with your lender’s consent, then you are a ready for a short sale.

Short Sale vs Foreclosure

Ultimately, no one wants to lose his/her home but if it comes to that, you might be better off with a short sale than a foreclosure. Why?

    • A short sale has less impact than a foreclosure. While short sales and foreclosures are likely on equal footing on credit reports and credit scores but the stigma that foreclosure carries is a different matter. When you do a short sale, you have more control of the situation because you are in charge of selling the property, working closely with your lender. That’s clearly not the case with your lender taking possession of your property. And on credit reports, a short sale is treated as a charge-off or deed-in-lieu of a foreclosure.
    • A short sale eliminates your mortgage debt. In short sales, lenders agree to take the sales proceeds in full satisfaction of the mortgage debt. That might not be the case in foreclosures where the lender can still seek deficiency judgments if the home sold less for the amount owed. To be safe, you can ask your lender to sign a waiver stating that they won’t run after you for any deficiency post-short sale.
    • A short sale has a shorter waiting period to get a new mortgage. Fannie Mae, for instance, allows borrowers with previous short sales to apply after at least two years compared with those with foreclosures who have to wait for seven years.

What’s In It for You

Many lenders agree to a short sale because it saves them time and money to initiate an otherwise expensive and time-consuming process to repossess someone’s home.

A short sale still requires paperwork to be completed and might take longer than foreclosures.

But it provides closure to homeowners who are willing to let go of their homes and eliminate their mortgage debt.

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