It's a homeowner's nightmare: the Covid 19 crisis has caused a significant loss of income and now you've missed mortgage payments. You applied for a loan modification but found out you don't qualify. You realize that you can't afford the home anymore and would sell but one thing is stopping you: you're underwater. Upside down. You owe more than you home is actually worth. What does that mean to you? That means you could be held accountable for the difference between what your home is worth and what you owe. How does this happen? It happens when your lender sues you for a second time, after previously suing you for foreclosure. Then a judgement is entered against you and the wage garnishments begin. For some, this means financial ruin. But homeowners who can no longer afford to keep making mortgage payments do have alternatives to bankruptcy or foreclosure proceedings. One of those options is a short sale.
A short sale occurs only with the lender's permission when a home's value has declined and the homeowner owes more than the home is worth. In this scenario, the homeowner has negative equity. A lender might accept a short sale with the property worth less than the balance of the mortgage if a borrower cannot continue to make the monthly loan payment and it doesn't appear likely he/she will be able to in the future. A short sale occurs when a property is sold at a price lower than the amount the homeowner owes on the mortgage and the homeowner's mortgage lender agrees to the short payoff, thereby satisfying the debt.
What benefits do a short sale provide to homeowners? It allows them to avoid a foreclosure and the many headaches that come with it, permitting a dignified transition into a new home. A home is typically foreclosed on when a borrower fails to make mortgage payments. A short sale can forestall foreclosure and its negative impact on your credit. It is less damaging than a foreclosure as long as the homeowner can persuade the lender to report the debt to credit bureaus as paid in full. A foreclosure can damage the credit rating of a borrower and make it difficult to obtain a mortgage for many years. Borrowers who are foreclosed on are often ineligible to purchase another home for 5-7 years with a traditional mortgage, where under certain circumstances, a short sale borrower can purchase immediately. It also allows the homeowner to walk away from a potentially expensive situation without owing the lender any more money.
As many Americans struggle with an economy that has been rocked with uncertainty, folks are having a hard time making monthly mortgage payments. Choosing between being foreclosed and initiating a short sale is an easy choice for a borrower having troubles paying their mortgage on time. If you're a seller, a short sale is likely to damage your credit - but not as badly as a foreclosure. You'll also walk away from your home without owing a penny to the lender.
Whether you should proceed with a short sale depends on your individual situation and what's likely to work best for you in the long run. If you can't afford your mortgage, and if home values have dropped in your area, you might not have much of a choice. A short sale might be able to help you preserve your credit and help avoid a foreclosure on your record. Come speak with our attorneys and we'll be able to help you navigate through the complicated and confusing aspects of this process and get you on the right path.
