With the housing downturn came the unfortunate news for many homeowners that the value of their homes has declined significantly, resulting in the value of their homes being less than what is owed in the mortgage and any additional equity loans. Normally this isn't a problem, unless personal circumstances result in the inability to continue making mortgage payments. Such circumstances can be job loss, upward adjustments in mortgage payment amounts, etc. In the case of job loss, perhaps the homeowner is forced to move out of the area to obtain new employment. In each case, the homeowner can no longer afford to stay in his or her home.
When the homeowner must dispose of his or her home, and the market value of the home (minus realtor and closing fees) is less than what is owed, then unless the homeowner has the cash to cover the shortfall, a normal sale of the home is not possible. In this "upside-down" scenario, foreclosure is often considered. However, foreclosure can be a serious detriment to the homeowner's credit rating, and may hinder his or her ability to obtain another loan or mortgage well into the future.
Another option is a "short sale", where the mortgage lender agrees to accept the sale of the home at a lesser
price than what is owed, and either forgives the shortfall, or requires the homeowner to sign a pledge
indicating his or her intention to pay back the shortfall at a later date. The lender may be open to negotiation
regarding the terms and/or the actual payback amount. While a short sale does show as a negative
item on the homeowner's credit history, it is far less negative than a foreclosure, and typically allows the homeowner
to resume borrowing normally within a couple of years.
To short sell your home, the first step would be to seek out a realtor who is knowledgeable of and willing to do short sales, as the process is more administratively complex than a typical sale. You may be required to submit a "hardship letter" to your lender explaining why your circumstances force you to short sell your home. If you have multiple loans against your home, short sale approval will be required from all lenders. And of course you'll need a potential buyer, and the buyer will need to be informed that the sale would be pending lender approval.
When staying in your home is no longer an option, and you owe more than your home is worth, a short sale is an alternative to foreclosure. Consult a real estate professional for further information.
The preceding article is not financial advice, and should not be interpreted as financial advice. The author of this article is not qualified to give financial advice. Always consult a qualified financial advisor before making any financial decisions.
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