Short Sales and Their More Attractive Alternatives

June 29, 2009 by Julio
Filed under Short Sale

Short sales are ways of repaying less than you owe on your mortgage through a special arrangement with your lender. They are only used when you are in dire straits, and have no other means of preventing foreclosure on your home. You still lose your home, but you can do so with minimal effect on your credit rating, and without still owing money to the lender.

It is very easy these days to get into this position, particularly if you have purchased your dream home during a period of low interest rates. A 4% interest rate can rapidly rise to 14% after a recession, and during a boom period, and that change would have a profound effect on your mortgage repayments, particularly if your agreement has no protection from this. A $150000 loan would increase by $125 a month for each 1% increase in the interest rate.

A short sale is a means of paying off part of your mortgage debt through an agreement with the lender that you sell the home for less than the amount still owed. This means that you would likely have negative equity, and cannot sell at a profit. It will be permitted only if the lender feels that the money they would be receiving from the sale is sufficient o make it financial good sense when they take the costs involved in foreclosing into account.

You cannot just carry out a short sale and expect the lender to agree to it: your mortgage lender holds your deeds, and will not agree to any sale that makes less than the amount still owed to them unless you have applied through the correct channels. There is a procedure to follow for short sales, and you also have to be very careful that the agreement involves absolution from paying the balance. Agreement to a short sale does not mean that the lender agrees to recognize the sum paid as settlement in full, and you could still be liable for the shortfall.

You should negotiate the sale in such a way that the lender accepts the proceeds as settlement in full. You will get nothing other than being free of your mortgage, which should be sufficient benefit to you when you consider the alternatives. You will also have to prove penury, with no cash in the bank, investments to sell, other properties, or even a flash car that could make up the difference. However, there are alternatives to short sales if you can get them.

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One is to rearrange your loan. If you cannot manage your repayments, the sooner you recognize and admit this the better. Too many people ignore the matter until it is too late to do anything, yet there are things that can be done to help you keep your home.

You can modify your interest rate, for example, and get an agreement to pay a lower interest rate now, and a higher rate later when you have more disposable income. This could be enough to enable you to keep paying. You could also have a modification made to the capital: some mortgage lenders will agree to reduce your capital and render your mortgage much more affordable. They do this because it is preferable to them than the high legal costs of going through the courts to repossess your property.

Another option is to come clean with your lender. Tell them you are in difficulty and ask what they can suggest. It quite possible that they will offer you an alternative arrangement that will allow you to pay what you think you can afford. They might convert the loan to interest only for a while, and possibly extend the term so that your repayments are less.

If you are otherwise solvent, however, they might be less understanding, so if you own thousands in stocks and other investments, realize these first or you could find your home repossessed. Your lender is not on your side: they only seem to be because they are working out what is best for them - not for you.

In a way, this is the same as a mortgage modification, and it is of extreme importance that you understand that you must stick to any agreement you come to. You will not be given a second chance. Every one of these is better than short sales, because with these you keep your house - with a short sale you do not.

So, if you ever feel that you are rapidly approaching a situation whereby you will find it difficult to meet your mortgage repayments, just remember that short sales are only one option, and one to be avoided until nothing else is possible. With this agreement, you lose your home. With most others you can make, you do not. Think about it and be proactive.

Don’t leave discussing your problems with your mortgage lender until it is too late - or a short sale will be too late for your dream home.