Image courtesy of Flickr, Tec Estromberg
If your home is worth less than the mortgage loan, selling using a short sale method will relieve the mortgage obligation and avoid a foreclosure.
Short sales are usually a last resort for many homeowners across the country; the only way out for sellers who owe more on their mortgages than what their homes are worth. For these struggling, underwater mortgages, a short sale is often the last chance to avoid foreclosure and the credit consequences that go along with it.
Despite all the good that short sales can do for homeowners, they also have a reputation for being stressful, time-consuming and complex. If you find yourself having the need to get out from under a mortgage that is no longer beneficial, you need to know the five elements that make up a successful short sale and how they apply to you.
When it comes to short sales, not just any real estate agent will do. You need a short sale expert. Find someone who has credentials, is certified in short sales and an agent with a history of repeated success in the area.
It is also important to know that you cannot sell your home yourself in a short sale transaction. You must hire an agent. Bank's require real estate brokers be involved in all short sale transactions, due to liability issues. However, the agent you hire is completely up to you. You will not need to pay your agent either; their commission is paid by the bank when your house sells.
Too often, underwater/upside down sellers are so anxious to sell their houses that they do not read the fine print of the short selling process.
Laws vary from one state to the next, but many states will allow lenders to pursue borrowers who have a deficient balance, even after a short sale or foreclosure is in the books. It is not uncommon for these homeowners to receive a collection letter for the difference between the amount the house sold for and what they owed at the time of the short sale or foreclosure.
If you owe $450,000 on your current mortgage, but sell the house for $400,000 because that's what it is worth in the current market, then it is possible your lender will send you a collection letter for a balance due in the amount of $50,000
Because of this, it is crucial for you to understand whether the lender agrees to waive the deficiency or not.
Many homeowners have successfully avoided deficiency balances using the Home Affordable Foreclosure Alternatives program (HAFA). Lender approved short sales that fall within the guidelines of this popular government program are required to release the borrower from a deficiency judgment, no questions asked, providing a short sale is successful.
With that said, it is equally important to note that lenders are not obligated to approve HAFA short sales either. Your agent will negotiate this on your behalf, but you need to know that every case is unique and not every case is eligible for this federally run program.
The majority of lenders will not voluntarily release you from liability on your loan for free. However, you may be able to negotiate a waiver and protect yourself from a deficiency, even without using the HAFA program.
In most negotiations, the lenders will require that you sign a promissory note for at least a small portion of the balance to help recoup the losses the lender sustains because of the short sale. Since these settlements are usually for pennies on the dollar, many homeowners' can afford the payments and not have to live with a judgement on their credit report for the next 10 years; something that will hinder you from financing future loans with beneficial rates and terms.
Experienced real estate agents are great to have in your corner during a short sale, but they are not attorneys. When it comes to the tedious process of a short sale, you need to talk to an attorney about potential tax implications, how it will affect other assets and property ownership that you may have. Short sales come with a lot of fine print. Lawyers can help you understand all of this so you feel more confident going into a short sale process.
Under no circumstances should you ever stop paying your homeowners association fees (if applicable), even when you are short selling your house, condo or townhome. Homeowner associations are notorious for increasing the costs, disrupting closings and even trying to foreclose on their own to retrieve what they are owed. Even if you pay nothing else, pay your HOA. Short sales are complicated enough, so it's important that you do your part to make the process less difficult.
Despite the fact that short sales are complicated transactions with long reaching consequences, they remain powerful ways for homeowners to get out from under a debt that they simply cannot maintain. Use these tips to help you navigate the troublesome waters of a short sale and you will soon find your way out of this scenario. To see a more in depth look into short sales, refer to our article titled " What is a Short Sale?"
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