Many people wonder if it is worth pursuing a short sale when a foreclosure on their ‘underwater’ home seems inevitable. For clarification’s sake, a short sale takes place when a mortgage company agrees to accept less than owed to pay off a mortgage through a sale of the property. A scenario in which a foreclosure would be more advantageous to the homeowner than a short sale is hard to imagine.
The potential benefits of a short sale are that your credit won’t take as big of a hit as it will with a foreclosure, and you have a much better chance of not getting stuck paying the deficiency at a later date. This is important because undoubtedly your mortgage has a deficiency judgment clause which states that the lender can get a judgment against you for the difference if they end up getting less for the property than the amount you owed.
These days, unlike during the early days of short sale, many deficiencies are actually waived by the lender during the short sale negotiation process. Many lenders are even giving relocation credits to the seller out of the short sale proceeds at closing. This means that the mortgage company will allow the homeowner to leave closing with a certain percentage of the sale proceeds to help cover their moving and relocation costs.
How does one qualify for a short sale? First of all, there must be a contract for sale of the property pending. The seller must contact the lender and get a short sale application along with a list of all the documents that the lender requires. The lender will consider several things in making their decision whether or not to authorize the short sale: They must be convinced that the seller is under hardship and if they don’t approve the short sale the property will end up in foreclosure. Also, they will only allow the short sale if they determine through their own research that the property is not being sold for less than it is actually worth. Ultimately the lender must conclude that they will come out better with the short sale than if they take the property back through a foreclosure sale.
Good advice to anyone contemplating a short sale is to act diligently. Put the property on the market as soon as you realize you can no longer make the payments, contact the lender as soon as the property goes under contract, and get all of the required documentation to the lender as soon as possible. This is important because at some point most of the benefits of the short sale can get lost. In the event that a foreclosure ends up getting filed anyway and there are a lot of missed mortgage payments in between, your credit will get beat up pretty bad even if the short sale ends up going through. An early decision to go forward with a short sale along with acting expeditiously should make a successful short sale more likely.