For a number of reasons, it is possible that the total owed on your home may be more than what the home is worth. Most of the time, this isn’t a problem because time is the solution. Depending on how much you owe, just be patient and the value of your home will increase. Problem fixed. Unfortunately, this might take years. And since you can’t do a no cost refinancing of your home when you’re upside down in your loan, you’re stuck in a situation where you absolutely have to sell your house.
This can happen for many reasons, some good and some not so good: relocation, financial hardship, divorce, death, illness, or anything at all. The end is that you may have to move, but you can’t sell your house and make enough on the sale to pay the closing costs.
So what is there to do?
Option #1: Do Nothing
One choice is sit and do nothing and not make the payment. That is a worst-case situation because it affects your credit rating worse than anything else possibly could.
Option #2: The Short Sell
It sounds like selling a home quickly, but it’s really selling the lender short. This is when you open up to the lender, let them know about your difficult situation and ask them to accept less than you actually owe.
The lender obviously won’t want to do that, but they also won’t want to shell out the costs of foreclosing a home, making repairs, and putting it back on the market, and getting the best they can into a market that’s already oversaturated with homes.
Lenders hate, Hate, HATE to foreclose, so a short sale might be a good option.
Don’t get your hopes up, though. A short sale involves a LOT of paper work, and you will invest a LOT of time and effort. It is preferable to have a real estate agent or someone knowledgeable guide you through the endeavor and lend support. It is a very stressful exercise, and you’ll need a lot of assistance.
Step #1 in a short sell is to get in touch with your lender’s Loan Service Department. That telephone number will be in the paperwork you receive about making your mortgage payment. Call them and write them, and keep copies of what you send them. Be persistent.
The lender will ask you to send them a statement of your finances. They just want to know that you in fact DO NOT have the financial assets to re-pay the loan the home has sold.
That’s just for starters, though, assuming they’ll even give you a tentative agreement.
Your RE agent still has to put the house back on the market, find a buyer, and get a concrete offer. Once that’s done, you submit your contracts and paperwork to the lender for a decision. This can take a while as there are a few decision makers in the mix
Your lender won’t always be YOUR lender; it’s just an entity that0 services the loan for your actual lender, also called the investor. The paperwork is submitted to the investor for them to review and decide.
Let’s assume you have insurance on the mortgage, well, there’s another decision maker in the procedure Mortgage insurance covers lenders in the case of someone defaulting on their loan. With mortgage insurance, lenders can justify making high loan-to-value (or LTV) loans.
Assuming the investor and the insurer are in agreement and your short sale gets approved, you can sell you home.
When it comes down to it, a short sale is just a “forgiveness of debt” that counts as income and that you must declare it to the IRS.
