Life circumstances sometimes change with no warning. There are any number of reasons someone’s income could dramatically decrease. For the homeowner, this could mean facing foreclosure. Being forced to leave the home you’ve poured your heart and soul into, not to mention the money you’ve already invested!
Rather than wait until there really are no alternatives, this is one life circumstance that you can take control over. Foreclosure may not be the only option. Your first step if you find yourself in a position of being unable to meet your monthly mortgage obligation for whatever the reason, is to call and talk to your mortgage provider. Discover if a modification is available. This might work to keep you in your home.
If a modification is not an option, you can still avoid foreclosure and the attendant destruction to your credit. With the help of a good real estate agent and some patience you may find a better way out of this particular dark tunnel is a Short Sale.
Short Sale refers to a situation when a mortgage lender agrees to accept less than is owed on a mortgage debt through the sale of the property.
Your real estate agent can help determine if this is the best solution for you to pursue with your lender.
- By providing a current Market Value, you will know if your home value exceeds the mortgage balance due
- By walking you through the entire short sale process so you will know what to expect and what is expected of you, such as providing a ‘hardship letter’ to support your request
- By acting as liaison between you and the lender, helping you avoid further emotional distress
There are several items you will want to take into account as you make your decision about the best route to follow through the financial crisis you are facing.
Tax laws are continually changing, so you will want to consult a tax specialist for the most up to date information. But these are some general guidelines you may want to be aware of:
- While all parties to the sale must be aware of and agree to the special circumstances, the original borrower may remain obligated for the remainder due the lender depending on the factors involved
- The borrower may have a tax penalty for the remainder of the balance not paid in a short sale; check with your tax specialist about how a short sale affects your tax obligations
- Acceptance of a short sale amount will be at the discretion of the lender, not the borrower, though the borrower has the option of rejecting any offers made to purchase
- Usually all proceeds from a sale go to the lender and the seller will not realize any return from the sale. There are some government programs that allow for a relocation amount; the lender may have information that is helpful in this area
Avoiding foreclosure, which causes damage to your credit, having a foreclosure notice posted on your front door and possibly putting a stop to collection calls are all good reasons a Short Sale may be your answer to a financial crisis. Although a short sale adversely affects credit as well, it does leave you in better condition than a foreclosure does and may allow for purchasing another home sooner. This opens the field to buying a home in a price range more affordable and with terms better suited to your current situation.
In almost every case of a Short Sale being approved by the lender, the homeowner will need to prove hardship making it impossible for them to continue making their regular mortgage payments.
Even if the home has lost so much value that a home owner finds they are reluctant to continue payments on a note that has a larger balance than the home’s value, a lender may agree to a Short Sale to avoid the homeowner defaulting on the loan.
You must consider and carefully weigh all the ramifications before pursuing this type of sale.
- Second mortgages and home equity lines are impacted
- Credit scores are impacted
- Ability to purchase again is impacted
- The process itself tends to be much lengthier than a traditional sale
Since banks are not in the real estate business and prefer not to have empty houses for sale on their P&L statements, in circumstances where true hardship to meet the obligations of a mortgage agreement exist, the Short Sale can be the better option for all parties.
Not every homeowner is a candidate for a short sale. Options are to be carefully considered before a homeowner elects to pursue a short sale. Tax, financial and legal advice is recommended for any distressed homeowner considering options
In some cases a strict financial hardship may not be required. However, a valid reason is usually necessary. Loss of equity is not considered a hardship. Relocation due to an employment transfer, illness, loss of income, military deployment or divorce is often considered compelling hardships.