How a Short Sale Can Stop Foreclosure
No one wants the stigma attached to having a home repossessed by the lender through foreclosure, or the black mark left on one’s credit history for every creditor to see in black and white. And it can stay there for as long as 10 years no less.
Many homeowners who bought around the top of the market, back in 2004 through 2006, are now stuck with having purchased more home than they could afford. Through the ease of obtaining exotic adjustable rate mortgages during those years, homeowners found themselves over-encumbered with debt, having financed as much as 110 percent of the sales price of their home.
As a result, they are now finding themselves with a monthly payment that is unaffordable as interest rates adjust to higher rates, thus bringing the new payment to as much as 25 to 50 percent higher than the initial payments they made.
Now they are left looking for a way out of a dire financial situation without the stigma left over. For distressed homeowners one possible option is the short sale. Selling a home via a short sale is a legitimate method for stopping the foreclosure process, allowing the homeowner to get on with life and without the ding to the credit record.
What’s the catch? By definition a short sale is literally the sale of a home for less money than is currently owed the lender on the outstanding mortgage being foreclosed on. In other words the home is “upside down“ from a financial aspect. Therefore, the catch is that in order to successfully conduct a short sale, the foreclosing lender has to agree to it, essentially agreeing to accept less money than it is owed on the loan secured by the house.
A short sale is not a vehicle normally seen during a seller’s market when multiple offers are lining up at the door competing with each other for the house. Short sales are most widely accepted during a buyer’s market when home sales are dragging, home values are declining, and inventories of available properties are growing to the point that the lender basically is just throwing up its hands and saying some money for the house is better than no money at all.
Lenders are not in the business of owning real estate. They get upset when they have too many properties on their REO (real estate-owned) books instead of out in the market making it a profit through monthly mortgage payments. Plus, the foreclosure process is not free. Every house they foreclose on costs them thousands of dollars. So, in some instances, agreeing to a short sale is in the lender’s best interest.
And it is up to the homeowner to convince the lender that this is one of those circumstances where it’s better to fish and cut bait. It’s a matter of numbers and economics. The homeowner needs to demonstrate to the lender hard numbers that will lead the lender to conclude that selling via a short sale is going to benefit them more than the amount they would garner from foreclosing on the property and then selling it as an REO.
Keep in mind there is one major downside to a short sale, however. As much as the lender wants to keep the property off its books, it also wants the money it’s owed. In many situations the lender will make it a condition of agreeing to a short sale that the homeowner sign a promissory note to make up all or part of the difference between the proceeds from the short sale and the amount owed on the original debt.
Also, an important aspect most homeowners don’t realize when they decide to go the short sale route, is that any amount of the debt that the lender forgives is considered to be taxable income by the Internal Revenue Service. The lender must submit a form to the IRS stating the amount of debt forgiven, so the tax man can be waiting for the homeowner when April 15 rolls around next year —if any of the debt was indeed forgiven.
So for homeowners looking at all their options to stop foreclosure and save their home, the first step should be to contact their lender right away to try and negotiate a workout plan to temporarily lower payments, or to refinance to a fixed-rate loan.
After those and all other options have been exhausted, the next step might be attempting to get the lender to agree to a short sale. If so, then before going too far it is advisable to seek the assistance of a real estate professional who is well versed in short sales. Not all real estate brokers or sales agents know how to conduct a short sale or how to work with lenders in negotiating one.