Falling behind on a mortgage payment and fearing foreclosure is a stressful way to spend those precious few last months in a home. If there are no options for keeping a home, sometimes the best solution may be to consider a short sale.
One of the significant benefits of considering this route instead of foreclosure is that legal problems, such as a lawsuit filed against the homeowner by the bank may be avoided. Additionally, although a short sale does result in the loss of a home, the process often offers a less-stressful way to overcome a mortgage that can't be paid.
When to Consider a Short Sale
The best time to consider a short sale is before the point of no return -- nearing foreclosure and mortgage default. When a borrower realizes that the payments on the mortgage may soon become impossible, the idea of a short sale is an important consideration. Economic circumstances are the most common reason why a borrower might need to look into a short sale; however, issues like a move or a family problem that requires the borrower to relocate may influence the sales decision.
A borrower must convince the lender that catching up on payments is a virtual impossibility before a short sale will be approved. It's essential for homeowners who are late on payments or who will soon become unable to cover the mortgage work swiftly to determine whether a short sale is feasible.
Ideal Time to List Your Home for a Short Sale
Though everyone’s situation is different, you should try to properly time the short sale of your property with the best time to receive offers and present them to the bank. You want a buyer who will wait for approval.
The best time to short sale your home is during a time when the bank will receive an offer a few weeks before the official 30-day behind mark. For example, if your mortgage payment is due on March 1st, it will be 30 days delinquent on April 1st. This will most likely be the date your bank reviews the short sale, so you want to receive an offer a couple weeks before that (since banks take 10 days to 2 weeks to pull documentation and review the file).
However, keep in mind when you’re in default, there’s no such thing as a good time to list your property as a short sale. Just go ahead and short sale it.
Bankruptcy & Short Sales
Because of debt issues, many homeowners need to file for bankruptcy. However, many homeowners ask the question, “Can I short sell my home during bankruptcy?” And the answer is yes. Whether your file for Chapter 7 or 13 bankruptcy, you will most likely not encounter any resistance from the bankruptcy court if you try to short sell your home. By definition, a home that is short sold has no equity to go after and thus is of no value to your creditors or the bankruptcy estate. Therefore, they should have no objection to you short selling your property.
There are more steps involved to short sell your home during a bankruptcy, so you should consult with your real estate agent, bankruptcy attorney, and accountant to outline a plan of action. At times, you may be better off surrendering your home back to the bank during bankruptcy rather than short selling it because you will not owe anything after you surrender the home and you will have no risk of tax liability if you surrender the home through bankruptcy.
Again, every situation is different for each homeowner and you should consult with your real estate agent, bankruptcy attorney, and accountant before deciding on a course of action.
Reasons for Lender Agreement
It may sound incredible that a lender would allow a homeowner to sell his property for a greatly reduced price and take a loss on the profits offered through a standard mortgage, but the time and expense of a foreclosure tends to eclipse that of a short sale.
Lenders are inclined to avoid foreclosure activity since a foreclosure doesn't just make a homeowner look bad. A foreclosure also makes a lender seem as though they don't approve mortgages to borrowers who will be able to pay back the debt.
Overview of the Short Sale Process
Requesting a short sale from a lender or bank is no guarantee that the sale will be approved. Preparing financial documents and letters before starting the process is essential. However, homeowners shouldn't take too long to figure out whether a short sale is the best solution.
Common steps in the short sale process include the following:
1. Letter of authorization: This notarized letter is required by the lender so that potential sales discussions may commence with buyers or real estate agents.
2. Hardship letter: This is a letter detailing why you can no longer make your mortgage payments, and it should be addressed to your lender. They need to see that a borrower's financial situation makes repayment of the mortgage impossible. This means a borrower can't have any assets or cash, such as savings and retirement accounts that may be sold to pay the mortgage.
3. Property appraisal: A home with a low appraisal often serves the borrower best, but the bank must be convinced that it will lose money in any type of sale due to market conditions.
4. Contract negotiations and settlement: All parties involved in the short sale process must sign documents and the bank must create a settlement sheet that details the financial losses expected of the sale.
Consider a Short Sale for Your Home
No homeowner wants to face the prospect of foreclosure, and a short sale that results in the loss of a home is just as emotionally challenging. However, undertaking a short sale may be the most expedient method for relieving an indebted homeowner of mortgage debt that cannot be paid.