When You Should Opt for a Short Sale versus Foreclosure
Although the 2008 financial crisis is an event that has largely faded from the consciousness of many Americans, its aftermath is very real to a large swath of homeowners, whose struggle with monthly mortgage payments and “under water” home valuations continues … unabated. Today I will examine the 2 worst scenarios and share thoughts on short sale versus foreclosure options and when these courses of action make the most sense.
Scenario # 1
In this scenario, your mortgage balance exceeds the market value of your home. The differential may be modest or significant. I won’t try to define modest and significant because the issue is extremely subjective—one man’s trash is another man’s treasure … blah, blah and blah. The real issue in this scenario is, “Can you meet the mortgage payment?” In my view, if you can answer in the affirmative, you don’t have a crisis on your hands.
Yes, it is unfortunate that your home choice, neighborhood choice, timing, down payment, term, other factors or combinations of factors, did not align with the stars and put you in a positive equity position. Boo-hoo! Yeah, it’s a tough break and maybe it’s not your fault but, maybe it is.
Doesn’t matter! Buck-up cowboy and stop your whining. Meet your obligation and be grateful that you can afford to keep that roof over your family’s head.
Allowing a foreclosure in this circumstance is unconscionable. In effect, what you are saying is, “I’m not going to suffer this loss. Let the lender take the hit, or the taxpayer—anyone but me!”
You must also consider the long-term damage to your credit score if you opt for a foreclosure. Even a short sale will ding your score from 50 to 150 points. If you do feel compelled to get out from under the mortgage, the short sale is the best option in this scenario.
Scenario # 2
In scenario # 2, you are unable to meet your mortgage payment and your home is worth less than the balance you owe. This scenario assumes you have explored the possibility of either a refinance or loan modification and did not qualify for relief.
You certainly can’t satisfy the mortgage by selling your home because it is worth less than you owe. In this example, a short sale or foreclosure are your only options. As in scenario # 1, the short sale is the better of 2 difficult choices. Your credit score will be harmed least and recover more quickly from a short sale, while the damage from a foreclosure is catastrophic and long-term.
What is a Short Sale?
The first imperative for a short sale is the cooperation of the mortgage lender. This is less likely to be offered if your mortgage is arrears. As a result, the decision to opt for a short sale must be made as soon as you have determined that staying in the home is out of the question.
Your lender will have to approve the terms of the sale and the buyer’s offer. By definition, there will be a balance remaining on your loan after the sale is concluded. In some cases, the lender will forgive this deficiency balance—in other cases the lender may make other arrangements for disposing of the balance due.
One thing is clear, the better your relationship with your lender, the more favorable the outcome will be. There is no better way to foster a positive relationship with one’s lender than to keep an open and honest dialogue going throughout the crisis period.
Smart lenders recognize that both foreclosures and short sales result in credit losses. The smartest lenders understand that working with homeowners to achieve a mutually acceptable short sale is almost always going to minimize the loss they will incur. Sadly, not all lenders are that sharp, which means that you might be headed for foreclosure regardless.
Simply this: Identify the severity of your situation early, maintain an honest and open dialogue with your mortgage lender, and, always try to negotiate a short sale in lieu of foreclosure. The short sale is the best solution for lender and borrower alike. The lender mitigates his loss and the borrower dodges a fatal blow to his credit score.
What About You?
Have you been through a short sale? What was your experience? Did your lender see the mutual benefit or did you have to do some convincing?