You receive a letter from your mortgage lender. Your loan is in default. You have 21 days to take action before the foreclosure process is officially underway. You vow to avoid foreclosure by all means necessary. You have heard that a short sale is better than foreclosure, but you don’t know why… or what that means to you… in your situation.
Let us break it down for you!
Are you facing foreclosure?
In Texas, foreclosure takes place outside of the judicial system, and the simplest way to avoid it is to settle the score with your lender immediately. Chances are, you don’t have a chunk of change stashed away for making good on delinquent mortgage payments, fees, and penalties. In any case, taking action is your first step. Your goal is to prevent foreclosure and its irreversible, long-term consequences to your credit.
No matter what, you own your home right up until the highest bidder wins the auction or the bank repossess it. You can try to save it or sell it. If you have negative equity in the property, a short sale may be your best bet (if not last chance) to avoid foreclosure.
Are you eligible for a short sale?
Initiating a Houston short sale is based on a few conditions. First, you must prove your state of financial hardship. Situations include: losing your job or having to relocate for work; divorce, separation, unexpected death or illness, and natural disaster. The damage from Hurricane Harvey was devastating for homeowners now left to recover their losses, repair flood-damaged properties and find ways to catch up on their mortgage payments.
The second qualification for a short sale is that the current market value of your home is less than what you owe (including all loans taken out against the property as well as liens, penalties, fees, back payments, and more).
Finally, you must be able to claim insolvency (or show that you do not have other significant investments or assets). There are no guarantees. A bank or lender may not approve you selling on a short sale.
Who should you work with to avoid foreclosure?
You must work with your mortgage lender to move forward with a short sale. Selling your home for less than what you owe requires approval from your lender; there is no other way around it. Be prepared with bank statements, pay stubs, copies of bills and expenses and other documents demonstrating your hardship. The more you can disclose to your lender about your state of affairs the more options he or she can present you.
Before a short sale, you may be able to negotiate the terms of your loan. For example, restructuring the loan to incorporate catching up on missed payments. Loan modification is particularly viable if you want to keep your home and feel confident about making good on payments. Beware the penalties for slipping up. Delinquencies on modified loans will be frowned upon if you want to pursue a short sale later on.
Your lender may also be able to get you a reduced interest rate. Just ask! Another option is to seek forbearance. If your property is flood-damaged or distressed as a result of last year’s hurricane, it is possible that you qualify for government refinance, or other programs made for homeowners facing similar situations. Temporary suspension of payments earns you time to figure out how to recover from short-term difficulties and get back to affording your Houston home.
What happens in a short sale?
It is your responsibility to sell the property. Many homeowners opt to work with a real estate agent specializing in short sales. In which case, once you have declared your financial situation and timeline, your agent will determine the value of your home, come up with an asking price, and list the property. An experienced agent will negotiate directly with the lender as far as what they expect to get from the short sale to avoid foreclosure.
Unlike traditional home sales, the mortgage lender is very much involved in the homebuying process. As a borrower and a seller, you will need to review every offer side by side with your lender before settling on a deal.
Once the buyer signs the dotted line; you move out. The money goes back to your lender, and your debt is cleared.
What are the benefits of a short sale?
You can remain in your home which gives you time to decide on your next move. By now you should be in contact with your insurance company. Depending on your policy, you might get a break on temporary housing or hotels if your home is uninhabitable due to a natural disaster.
Once a foreclosure is on your record, you may not be able to obtain a new mortgage loan for seven years whereas recovering from a short sale may be possible in two to four years, giving you ample time to reestablish credit and qualify for conventional loans.
Keep up with your mortgage payments while your home is listed to sell. Doing so is unlikely to boost your credit score, but is far better than adding more late payments to your report (which will hurt you worse).
Above all, short sales pause the foreclosure process. The question remains: are they better than foreclosures? The bank and Uncle Sam would say, yes.
What are the drawbacks?
No matter how you justify it, the fact remains that you are not paying back the debt you initially agreed to pay your mortgage lender. The IRS treats short sale ‘forgiveness’ as taxable income so don’t be shocked by having to pay income tax on a home you no longer own.
Short sales do not make the prospect of foreclosure disappear. Just because you have initiated the process does not mean you should stop making payments! The lender reserves the right to deny the short sale, leaving you right back on the road to foreclosure (much closer to it, than where you started) and you will have fewer if any, alternatives for avoiding it.
Are there alternatives?
Although increasingly common for homeowners with negative-equity, short sales are not hassle-free.
If you owe more than the value of your home and want to keep the home, renting it out and collecting monthly checks might float you for awhile. This can be advantageous if you are confident that your hardships are temporary. Renting or leasing a home requires that it is in good condition. Make sure to factor in costs for repairs and other expenses before deciding on this option.
If you do decide to pursue a short sale and want to ensure a quick turnaround, selling your home for less than what you owe to Houston cash buyers is an alternative to selling with an agent to traditional buyers. Mortgage lenders want to close short sales quickly and typically qualify only the highest and best offers. Lenders like working with cash buyers to avoid foreclosure because there’s a guaranteed, fast cash offer on the table. Remember, foreclosure is costly for everyone, including the bank.
Upside down? Underwater? If you are thinking about selling your home for less than what you owe on it, we can help! We work with homeowners in tough situations. Whether you are pursuing a short sale or facing foreclosure, contact us today about a quick cash offer. We buy houses in any condition!