My last blog dealt with the issue of foreclosures, and I expounded on my professional opinion that foreclosure is an avoidable option. I wrote primarily about working out issues with the lender or loan servicer. Fortunately, if you have the means and desire to stay in your home, your lender will work very hard to accomodate you. The downside to all this, however, is that many current homeowners do NOT have the means to stay in their homes.
What types of situations prevent a homeowner from staying in his/her home? An unexpected and long term drop in income, death of a spouse, divorce, sudden and chronic illness that prevents one from working are all examples of situations that leave the homeowner with an inablility to pay. While lenders are very motivated to assist struggling homeowners, they will do so only if there is a high likelihood that the homeowner can pay on a regular basis. Absent the ability to make monthly payments, there is no lender in the world that will re-finance or restructure an existing loan.
So what are you to do if you find yourself facing such a situation? What if you have to sell, because you simply cannot afford to stay in your home, but you have little or no equity? If you cannot afford to pay your monthly mortgage, you likely cannot afford to bring money to the closing table when it's time to sell. Fret not, however, since there is still an option, and a good one at that.
Let's discuss the concept of SHORT SALES, what they are and why you should consider one. Simply defined, a short sale is a negotiated settlement between borrower and lender in which the lender agrees to settle for less than the amount owed, while considering the debt satisfied. In a time when most homes have lost significant value, many homeowners facing foreclosure find themselves with properties that are worth less than what is owed. Short sales are vastly preferred by lenders to foreclosure, since they will lose considerably less money through short sale than foreclosure. A caveat, hower: Short Sales are not a panacea for all that ails you. You must be able to demonstrate a legitimate hardship in order to qualify for one.
Since most foreclosures occur within two to three years of a new home purchase, most defaulting homeowners face this very situation. Let's assume you have objectively looked at your finances, and determine that you simply cannot afford to remain in your home. Your monthly income simply cannot carry all your expenses, including housing, utilities, food, gas, car expenses, and more. Many homeowners have come to such a conclusion, and just decided to walk away from their homes. This is abandonment, and if you do this, you will be foreclosed upon. DON'T DO THIS!
Here is some good, practical advice. If you are not certain what your home is currently worth, contact a local realtor. Especially important is to find one who has significant experience with short sales. Ask your realtor to perform a Current Market Analysis to help gauge your home's value. If, as expected, your house is worth less than what is owed, ask him/her about a short sale. You'll want to explore every possibility of keeping your home first. Once you have exhausted that possibility, you'll need to move quickly.
For the purpose of brevity, I will compare and contrast short sales versus foreclosure, and leave the details of the process for another time.
First and foremost, you need to understand that you will receive no proceeds from a short sale. That means you won't walk away with a single penny from the sale. You will, however, be doing yourself a world of good, even if it isn't reflected in equity. Here are the immediate benefits: minimizes damage to your credit; removes the burden and stress from the foreclosure process; allows you to move on to the next chapter of your life more easily; allows you to satisfy your debt obligation; and costs you absolutely nothing!
Contrast this to a foreclosure. Having the word "foreclosure" on your credit report is about the worst possible thing to have. It just ruins your credit score, and what's worse, it takes several years (7-10) to be removed. That will not only dramatically drop your credit score, but will impact you in many unfavorable ways. You'll likely see a dramatic increase in interest rates on your credit cards and car insurance. It can dramatically increase the cost of renting, or make it much more difficult to even secure a rental. And worst of all, it virtually removes you from the real estate market for a period of at least five years.
With a short sale, a seller would benefit by having: a negotiated settlement; credit bruised, not ruined; no attorney's fees; liens negotiated; and ability to re-enter real estate market within two years.
With a foreclosure, a seller would likely experience: a court judgment; credit badly damaged; significant attorney fees; no peace of mind; very real possibility of civil suits from lender for monetary damages; and complete inability to reenter real estate market for at least four years (probably longer).
When you weigh the costs and benefits, it should be easy to see that selling short is vastly preferable to losing the house to foreclosure. Bad things happen to good people. You deal with the consequences and move on. Doesn't it make sense, though, to do all you can to minimize the damage to yourself? For more information on this subject, please feel free to contact me at Chuck@ChuckGollay.com.
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