Recently on our legal forum a user asked, “I bought a house two years ago. I had a great job, but I bought a home that was a bit out of my price range. Three months ago I lost my job. I have not made my mortgage payment since then, and the bank is threatening foreclosure. I am wondering if what a short sale is and whether it might be a good idea?”
Homeownership is a goal for many Americans. Unfortunately, it sounds like you bought more home than you could afford and did not have enough discretionary money to meet your mortgage obligation without full-time employment.
The good news is mortgage companies are not in the business of homeownership. In fact, some companies will be willing to take significant steps to avoid the cost, expense, and hassle of home foreclosure. With that in mind, let’s review what a short sale is and determine whether it might be a good option for you.
What is a short sale?
A short sale allows a homeowner to sale their home for less than the amount they owe on the mortgage. Because the lender will receive less than the amount owed on the mortgage, however, they must agree to the short sale. The mortgage lender generally will only agree to a short sale if they do not believe the home owner will be able to continue to pay the mortgage, they will be forced to eventually foreclose on the home, and they determine a short sale is a less expensive option than foreclosing on the home.
Should you consider a short sale?
Although a short sale may be a good option for some homeowners who are not able to pay their mortgage and want to avoid foreclosure, it may not always be the best option. Before making any decisions it’s a good idea to talk to a financial expert and review your options. In fact, there are several factors to consider.
For example, you will need to review whether the short sale will actually eliminate the debt owed. Some lenders may only remove the lien on the property and then require you to sign an unsecured promissory note before they will approve the short sell. Consider, however, some states bar collectors from suing for deficiencies after a short sale so you will need to understand your state’s laws.
Will a short sale save my credit score?
Another consideration prior to agreeing to a short sale is whether it will impact your credit score. Many homeowners believe that a short sale is much better than a foreclosure when in reality your credit score is still likely to take a major hit.
Other considerations prior to a short sale include determining whether you might have to pay taxes owed on the deficiency, the time it will take to complete the short sale, other options available to save or sell your home, whether other creditors hold liens on your property, and whether you really qualify for a short sale.