There is no question that the current economy has left the real estate market in a state of chaos. While home ownership used to be a major part of the American dream, over the last two or three years it has more closely come to resemble an albatross around the necks of many folks. Home prices have continued to sink, leaving homeowners in a lurch, owing far more on their houses than they are currently being appraised for. The end result is a dream for those looking to buy a home (you can pick one up for the proverbial song), but disastrous for anyone looking or needing to get out of their home.
In the industry, “upside down” is the phrase used to describe any scenario where you owe more on your home or vehicle than it is worth. If you have lost your job, or if other circumstances have arisen that make it impossible for you to continue making payments on your house, the usual end result is foreclosure, the bank taking possession of the home and evicting the occupants.
The obvious solution in such cases would be to sell your home. However, with the glut of homes currently on the market, that is not as easy as it sounds. The real estate world is replete with stories of people who put their homes on the market only to watch them sit…..and sit….and sit….for months at a time without so much as a nibble.
The other solution is a “short sale”, where the home or property is sold for less than the balance due on the mortgage. The lender takes a loss, but not as severe a loss as they would had they foreclosed. Obviously, this does get you out from under a home that you can no longer afford, but is it the best option?
You should always consult a professional real estate advisor before making such a decision. Here are a few of the good and bad points to consider:
– It eliminates the possibility of foreclosure. Foreclosure is a time consuming and stressful process on all involved, sometimes taking up to ten to twelve months to complete.
– Unlike foreclosure, which takes the situation out of the homeowner’s control, a short sale allows you to retain some measure of control over the process. If you can find a buyer and negotiate terms with a bank, the negative impact on your credit score may be reduced.
– While short sales do affect your credit standing, it does not do so as badly as if you had been foreclosed upon. Less damage to your credit means you can potentially get back into another house sooner rather than later.
– Large monthly mortgage payments will be eliminated, giving you the added funds every month to get back on your
– There is always the possibility that the lender may forgive the difference between what you owe and the final price. Obviously this is not guaranteed, but it is an agreeable outcome if offered.
– You will be able to re-qualify for a loan much more quickly than if you had been foreclosed on, due to the less severe impact on your credit score.
– If you are not able to make your payments or work out an acceptable agreement with your lender for a lower payment, a short sale may be the last best option, even if it does mean losing your home and initial investment.
And now, the bad:
– While a short sale is less damaging to your credit than a foreclosure, the operative word is “less”. There will still be some damage to your credit rating, and the chances of getting another mortgage right away will be slim at best
– You may still be required to pay taxes on the remaining debt owed. The IRS treats the forgiven debt as taxable income.
– The lender does not have to agree to a short sale. They may very well insist on payment in full.
– You will have to provide proof that you are no longer in a position to make your mortgage payment. If you have indulged in foolish actions such as simply living beyond your means, it is highly unlikely that the lender will agree to a short sale. Legitimate hardships, such as divorce, extended illness, or job loss are usually accepted as valid.
– Despite its name, a short sale is anything but short. It is a long and involved process requiring all the right paperwork, documentation, as well as speed of the lender in expediting the process. Lenders are not known for being enthusiastic participants in short sales.
– Once the lender approves the short sale, it is still dependent on a good offer from a good buyer (i.e. a buyer that can actually get approved). Real estate agents may get smaller commissions on short sales, reducing their enthusiasm for your situation.
– The bank may still pursue a repayment of the forgiven debt. Never assume.
Basically, while short sales may seem like a way out from foreclosure, it is important to remember that there are still negative effects to the process, no guarantee that the lender will agree to it, a considerable hit to your credit score, etc. However it is a viable alternative to a foreclosure.
Before making any decision on a short sale, contact a real estate professional with a successful record in short term sales.