Real Estate Short Sales
As missed payments and mortgage defaults continue to rise, many homeowners are looking for a way out, hoping to avoid foreclosure along the way. One such way is with a “short sale”, which is a carefully agreed upon sale of a property for less than the amount of the mortgage balance as a means for a bank or lender to cut their losses.
Although not a common practice, short sales are typically reserved for extreme cases when the bank or lender decides that it is in their best interest to take a loss instead of enduring costly foreclosure proceedings. Yes, foreclosures cost banks and lenders money too.
If you’ve missed a few mortgage payments, and recently received an NOD, or Notice of Default, you may be seeking out foreclosure alternatives. But if your existing mortgage balance is greater than the value of your property, and you don’t have the means to make full payments, you could have few places to turn aside from foreclosure.
The reason foreclosures weren’t an issue in the preceding few years was due to appreciating home prices. Even if homeowners fell behind on payments, their homes were worth more than what they bought them for, so a sale would be possible without penalty because they gained equity in their home beyond the mortgage balance.
Nowadays, with home prices stagnating or dropping, homeowners aren’t so lucky. That’s why many homeowners who got into negative amortization loans are finding themselves with a mortgage balance greater than the value of their home because they paid less than the actual interest rate month after month until their loan adjusted. And at the same time, the value of their home either stayed the same or dropped.
Let’s look at an example:
2003 Property Value: $500,000
Existing mortgage balance: $490,000
2007 Property Value: $600,000
In the above situation, though very little of the mortgage has been paid off, there is still $110,000 in equity, so a short sale is not necessary, as the owner could sell the home and cover the cost of the mortgage with plenty of room to spare.
Here’s another example:
2006 Property Value: $650,000
Existing mortgage balance: $660,000
2007 Property Value: $655,000
In this example, though the home appreciated slightly, the borrower was making 1% payments each month, tacking on additional interest on top of the loan balance. The result is a mortgage balance greater than the value of the home, making the situation ideal for a short sale if the borrower falls seriously behind on payments.
Short Sales Are Complicated
So are short sales the answer? Before you think you’ve got the magic bullet, think again. Short sales are complicated processes, just like foreclosures. They take a lot of time and work, as well as cooperation from a number of interested parties, including the bank or lender, a home buyer, real estate agents, and you.
If you’ve missed multiple mortgage payments and you’re facing foreclosure, the bank or lender won’t automatically offer a short sale. You need to prove that your situation merits a short sale, which typically involves providing documentation that proves you are indeed in dire straits (not the band) with no other viable options. And even if your situation fits, the bank or lender must still decide if your particular situation works for them financially.
As the ailing homeowner, you’ll need to find a prospective buyer for your home. And as you probably know, selling a home takes time, especially in today’s market. Coupling that with complicated processes to assess sales comparisons in the area and the fact that the lender must decide if the price is right, things could take a while.
Short Sales Are a Last Resort
Though short sales can be a blessing to some homeowners, as they don’t do nearly as much credit score damage as a foreclosure, and typically cost less money, they should still be treated as a final option before foreclosure. Do you really want to lose your home?
There are other options out there to stop loan foreclosure, and if you speak with the bank or lender servicing your loan they’ll likely point out other alternatives first. Ultimately banks and lenders want to cut their losses, and they’ll do what’s in their financial interest first and foremost. So if you do decide to pursue a short sale, expect to make a strong case for yourself and your situation or you’ll likely be denied. Though volume of short sales is picking up, it won’t always be an option. Make sure you always consider all of your options before making a huge decision concerning the sale of your home.
