Lender can agree to take loss on loan
Q. My husband and I are way behind on our mortgage. We have decided to try and sell our home. We had a Realtor over a couple nights ago to get an idea what our house would sell for and what costs would be involved. When we calculated the sales price and expenses, including our mortgage balance, we found out that there is not going to be enough money from the sale to pay all the expenses plus the mortgage.
The Realtor tried to explain to us something called a "short sale" but we did not fully understand what she was saying. What do people do in situations like ours? We want to pay off the mortgage if we can, but we won't have any money except for what we receive from the sale. Any suggestions would be appreciated.
A. A "short sale", which is rapidly becoming two of the most common words used in the real estate industry, simply means that the mortgage company is accepting less than the full balance owed to them in return for them releasing their mortgage lien on the property.
As you may expect, short sales are becoming more and more common as delinquencies escalate and home prices fall. Whether or not a mortgage company will approve a short sale is up to each lender on a case by case basis. Generally, for the mortgage company, the alternative to a short sale is obtaining the property either through a foreclosure or by agreement, such as a deed in lieu of foreclosure. As you can imagine, the last thing most mortgage companies need is another parcel of residential real estate in their portfolio. Accordingly, most mortgage companies will be very reasonable in deciding whether or not to approve a short sale.
Obviously, one of the major issues for the mortgage company is how "short" is the short sale. In other words, if the mortgage company is owed $200,000 at the time of closing and you can pay $197,000, this will probably be an easy short sale to get approved. If, on the other hand, the mortgage company is owed $200,000 and you can only pay $140,000, this is going to be difficult to get approved.
When you apply for a short sale, the mortgage company will usually have the property appraised. Once they determine the fair market value of the property, they then determine whether they would be better off letting you sell the property and accepting an agreed shortfall or taking the property back and selling it themselves. Given the length of time required to obtain the property, the costs involved with obtaining the property such as attorneys fees and loss of interest during the redemption period and the costs then associated with selling the property, such as real estate commissions and title fees, many times the lender will determine it is in their best interest to allow the short sale.
Given that it does not appear that you will receive any cash from the sale of your property, another option for you to consider would be a deed in lieu of foreclosure. Here, you simply deed the property back to the mortgage company and they agree to not to hold you responsible for any shortfall. Your credit is protected and you are not required to go through the sometimes arduous process of obtaining approval for the short sale. The disadvantage of the deed in lieu of foreclosure is that you will usually be required to vacate the property sooner than if you held out through the foreclosure process.
Before you give up though, have you contacted the mortgage company about other alternatives? Both as a result of recent federal law, enacted and pending, and the fact that you lender doesn't need any more property in its portfolio, lenders are becoming more and more flexible in working out distressed loans. It may be possible to get out from under the accumulated arrearage on your mortgage and start fresh. You will never know what might be available to you unless you ask.