For homeowners upside-down on their mortgage — owing more on the loan than the house is worth — foreclosure isn’t necessarily the only option.
There’s also a short sale.
A short sale is when a financially troubled homeowner, with the lender’s approval, sells his or her home for less than what’s owed on the loan.
The main benefit of a short sale is that you get out from under your mortgage without liability for the deficiency. A deficiency occurs when what you owe on your mortgage exceeds the amount you get when you’ve sold your home.
“It is a negotiated loss to the bank between borrower and bank,” said Craig Jarrell, president of the Dallas region of Iberiabank Mortgage Co. “You are even and not hit with a deficiency judgment — off the hook.”
But don’t expect the process to be simple and effortless. You’re asking the lender to take a loss on your mortgage, and the financial institution won’t agree to that easily.
Russell Berry, real estate agent and owner of DFW Sells Real Estate in Grapevine, Texas, said the homeowners best suited for a short sale are at least two months behind in their mortgage payment; can’t sell their home for what they owe on it, plus closing costs; and don’t have equity in the house.
For Calvin and Claresia Brooks, a short sale was their only option.
The Brookses bought a home in South Dallas in 2006 but decided not to live in it because both of their jobs were in North Dallas. They bought a home in Garland, Texas, instead and rented out the South Dallas home.
“It made sense for us to lease it out since our jobs were so far away from that area,” Calvin Brooks said.
But several of his tenants ran into hard times and could no longer afford the $900 monthly rent.
“I have had several tenants, and it’s always been something job-related to their getting laid off and trying to maintain the payment on the property,” said Brooks, an internal auditor at a bank.
Then his wife got laid off from her job at a pharmacy benefit management company, which made it difficult for them to afford the mortgage on the rental home and the Garland home.
“I said, ‘I can’t pay this (rental home mortgage) out of my own money,’ because I was paying our own note,” Brooks said.
The rental home was also upside-down.
“Nobody was making offers for what I owed on it,” Brooks said.
So he worked with his lender and completed a short sale in the spring. Brooks said he owed about $90,000 to $95,000 on the mortgage and sold the home for about $35,000. The whole process took about six months, he said.
If you’re upside-down on your home, here’s what you need to do before entering into a short sale:
EXHAUST OTHER OPTIONS: Financially troubled homeowners should first try to obtain a loan modification.
A loan modification changes the existing loan by lengthening its term or lowering the interest rate so that struggling homeowners can continue to make their mortgage payment.
“A loan modification is the first thing to look into,” said John Anderson, president of Oyezz Real Estate in Frisco, Texas, which specializes in short sales. “That is something they can do themselves with a lender.”
GATHER YOUR RECORDS: If you choose a short sale, be prepared to justify it.
Since you’ll be selling your home for an amount that won’t cover your loan, you can be sure that your lender will want to be absolutely certain you have no other means to pay your mortgage.
“Getting out of a loan is just as hard, if not harder, than getting qualified for a loan,” said Berry. “They’re going to check your finances to make sure you don’t have money hidden away.”
Be prepared to provide bank statements, tax returns and other documents.
“They will make sure your account is not reflecting any income coming in,” Berry said. “They’re going to make you prove you can’t afford it.”
GET HELP: Find a real estate agent who’s done short sales before.
“It’s a complex transaction that requires a lot of paperwork to go to the lender in the correct process,” Anderson said. “If not, the short sale dies and the consumer in most cases ends up being foreclosed on.”
The real estate agent will help you price your home so that the short sale will go through.
“It’s about the value of the property, not what is owed on the property,” said Jerry McCoy, vice president of Homeownership Preservation at Chase Home Lending. “There are so many times that we find that borrowers are listing their house (for sale), and they’re listing it for the amount that they owe on the loan. But that could be higher than the market value.”
Real estate agent Coffey Caesar said she looks at what other homes are selling for in the area when pricing a client’s home for a short sale.
“I look at the dollars being spent today in their area,” said Caesar, of the Coffey Caesar Real Estate Firm in Dallas.
Be realistic about what you will get in the transaction. The lender has agreed to accept less than what you owe on the mortgage, “which means you will get nothing,” Caesar said.
“There’s not going to be a profit here in a short sale,” she said.
BRACE YOURSELF: While a short sale isn’t a foreclosure, it still will hurt your credit.
“They are both bad,” said Maxine Sweet, vice president of public education at credit bureau Experian. “The loan is closed for less than the original amount so the status is reported as ‘settled.’ A settled account is a derogatory item on par with a foreclosure or deed in lieu of foreclosure.”
Between a short sale and foreclosure, a short sale is the lesser of the two evils but only if “the lender doesn’t report the deficiency balance to the credit bureaus as part of the short sale,” said John Ulzheimer, president of consumer education at SmartCredit.com.
“Both are very bad, but the short sale is better if the deficiency balance isn’t reported,” he said, adding that the practice varies by lender.
The most important thing to remember is that if you have trouble paying your mortgage, contact your lender immediately to see if you can work things out so you don’t lose your home.
Source: McClatchy-Tribune Information Services.