Perhaps you are wondering about trying to get approval for a short sale. Can you spell “major hassle?”
I have listed successful short sales and I have also listed short sales that went down the toilet. In the process I have learned some basic truths about the short sale process and about mortgage lenders in general.
Here’s the Bottom Line:
You do not want to get on “the bad side” of your lender. The situation can turn ugly in a hurry.
Let’s be clear about your lender’s motivation for doing a short sale. They will only approve a short sale if foreclosure is a real and imminent possibility. That means you need to be seriously behind on your mortgage payments, and you also need to be able to prove that you have a legitimate financial hardship brought on by something like divorce, death of a breadwinner, protracted unemployment, or extended hospitalization.
If you can prove legitimate hardship, then most lenders will consider doing a short sale. However, they are not motivated by sympathy. Rather, they are interested in seeing if a short sale will net them more money than the amount they will be left with after going through the legal expenses and holding costs associated with foreclosure.
Please do not take their attitude personally. It is NOT personal. It is business, plain and simple. The mortgage corporation simply does not care about you or whatever pain or discomfort you may be going through. The company is big and impersonal on purpose. It is ONLY interested in solutions that will minimize their losses and increase their profits.
Here is the Primary Short Sale Deal Breaker:
If you are able to keep up with your mortgage payments, and you want to protect your credit scores, then a short sale is NOT an option for you.
A Couple of Bad Ideas
- If you are current on your payments and you need to sell quickly, then you can probably do an owner finance with a wrap. However, in my opinion, that is a shady and risky way to go, so I don’t recommend it.
- Another scenario to avoid is the misguided attempt to rent out your home until the market improves. Imagine how your home will look several years down the road after tenants have trashed the place.
Wise Alternatives to a Short Sale
If you are current on your mortgage payments and you want to protect your credit scores, then there are two respectable paths remaining for getting your house sold even though you are upside down on your mortgage:
- Sell it at current market value and bring enough cash to the closing table to cover the shortfall so you can walk away clean, or . . .
- Invest wisely in your home to increase its market value to the point where you can break even on the sale. Given the normal costs of sale, you should work toward an appraisal value that is at least 10% higher than your mortgage balance.
The main benefit of the investment approach is that you can cover a lot of your shortfall with sweat equity. That is also the downside because it will take a lot of time and effort to do the improvements on your own. The investment approach also carries some risk because appraisal values are based primarily on the recent sale prices of other homes in the surrounding neighborhood. Consequently, appraisers cannot reward you with a higher value for an endless number of upgrades. At some point they will begin to categorize additional upgrades as “over improvements” which do nothing to increase your appraisal value.
Practical “Real Life” Considerations
If you don’t care about your credit scores, then you might be a candidate for strategic default. By “strategic default” I mean that you have the ability to continue making your mortgage payments but you simply choose not to. You forget about loan modifications and short sales, and you just walk away. I don’t recommend this approach, but in reality, the consequences are not much different from the consequences of a successful short sale.
You need to know that lenders consider a short sale to be pretty much equal to foreclosure. If you ARE upside down on your mortgage, then whether you default or do a short sale, either way, the lender is looking at the prospect of having to book a loss. They will respond initially by going into loss prevention mode. Then if they determine that a loss is inevitable, they are likely to initiate delay tactics to put off having to book the loss. You could be caught in a long slow “meat grinder” of ongoing demands for updated financial documents coupled with repeated threats of foreclosure and eviction.
Can you spell “STRESS?” I’m serious. You might need to go see your Doctor to get a prescription for blood pressure medication.
Here’s the Final Kicker:
Whether you do a short sale, a deed in lieu, or a strategic default, the impact on your credit scores will be roughly the same, and you will not be able to get another mortgage for a period of 3 years after the date of title transfer.