I recently posted one of my strategies for “Getting Unstuck” from your home. A different direction, and one predicated out of hardship, is a short sale. I’m sure you’ve heard a lot about this type of transaction. It can seem a little complicated, so let’s break it down here.
First, let’s start with a definition – what is a short sale? It’s a transaction whereby a mortgagor (your lender) agrees to accept less than what is owed on the balance of your mortgage due to a hardship. These types of sales started several years ago, but have become a large portion of the market as the economy and housing market receded. It is considered a distressed sale, as it’s a pre-foreclosure move. In other words, sellers in danger of losing their homes to foreclosure will try and execute a short sale before that happens.
How do you qualify for this?
-You must be able to show a justifiable hardship to your lender. This may include job loss, medical issue, relocation and in cases of condominiums, changes in rental restrictions.
-You must not have any liquid cash reserves that could be used to pay off the outstanding balance (a short sale is based on need, not want – as in “I don’t want to pay an extra $20,000 to get out”)
If you’re stuck in a property and can no longer afford to make your payments, the short sale may be your best option (especially if renting your home out is not feasible). If you think you may qualify, here are three things you should do first:
1)Talk to a real estate attorney that specializes in short sales
2)Repeat step 1
3)See Step 2
While not an attempt to be cute, discussing your situation with a real estate attorney that specializes in short sales is the most important thing you can do. From the start, you need to know that a short sale is viable and has a chance to be approved – for yourself, for your realtor and most importantly, for potential buyers.
Is a short sale better than a foreclosure? In my opinion, absolutely yes. In a short sale, your credit score may be reduced by up to 150 points, and the earliest you’ll be able to buy a home with financing is approximately 18 months. By comparison, foreclosure reduces your credit by 250 points and restricts you from purchasing a home for approximately 7 years. If it were me, I’d rather take the short sale hit.
One final thing to consider and be prepared for, is that your lender may issue a deficiency judgment against you. That means they would still expect payment of a set sum of money. Earlier this year one of my sellers was able to short sell their home for approximately half the value of the mortgage. While they were hit with a $20,000 deficiency by their lender, they were able to pay it back monthly over 10 years. So, for $160 a month, they had approximately $180,000 in debt forgiven. For a seller in distress, I’d say that’s a blessing.
This is, of course, a very broad overview. Each person’s situation is different, and pursuing a short sale is not something to be ashamed of. It’s a plausible solution to solving a problem. I see a lot of sellers simply fore go this option and let the bank foreclose on them. If you think a short sale may be your best option, feel free to contact me confidentially via e-mail (email@example.com). I’d be happy to offer some more options based on your specific situation and connect you with a talented real estate attorney locally, or a talented real estate team nationally.