I just finished watching a show on CNBC called The Millionaire Inside: Debt Makeover and I was astonished at the real estate advice the Money Mentors were offering.
Granted. The debtors (two couples and two singles) were in deep debt and had pretty poor credit scores as a result. However, there seemed to be pretty consistent counsel to sell their home in a "short sale" as part of the plan to get out of debt. In fact, the Money Mentors made this suggestion so quickly that it made me wonder if they realized that "short sales" weren't that easy and would effectively prohibit the debtors from ever buying another house.
A "short sale" is what people do when they're one step away from foreclosure. The concept is that if you're able to sell your house before the actual, formal foreclosure you will be able to salvage a little bit of your credit so that you can try again at some point in the future.
The term itself refers to the fact that the home seller is a little "short" of what they actually owe on their mortgage. They can't sell their house for what it would cost to pay it off. The catch to this arrangement is that the bank or mortgage holder needs to agree to take the loss. Think about it. If you loaned me $400,000 and two years go by and I ask if it's OK if $300,000 will make us even, would you say "No problem."? Probably not. Or, at least, probably not without giving me a lot of hassle and making sure my life would be miserable for the foreseeable future.
That's the same way with the banks. They don't want to take the loss but if they have to they're going to make darn sure you feel some pain as well. They do this by putting you and whoever wants to buy your house at the lower price through hell and then destroy your credit rating, to boot.
There is a common misconception that banks or mortgage holders would rather take a little loss in the beginning rather than foreclose and take a bigger loss later. The problem is that there are lots more of these types of delinquencies and more people are coming to the mortgage companies asking for a way out. Unfortunately, the mortgage people don't know the real hard luck cases from the people who are just running into a little snag and can continue to pay the mortgage if they were "scared" into it by hard-nosed negotiating tactics.
Thus, you have lenders (more than you would think) that don't negotiate with you until you're between a rock and a hard place. They basically force you into a situation where your credit is already destroyed by the time they come around to agreeing to take a loss. Some will provide a little forbearance for you if you can document like crazy that your situation is temporary and you'll get yourself back on track. Don't ask them to cut you slack, though, when it comes to selling your home.
There's a reason why you sign over your home to the bank when you sit down at the settlement table. The banks may not really want to own your house but they sure as heck aren't in business to give money away.
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