If you own your home and are behind on payments, you may wonder what step to take next. Millions of American homeowners have been struggling to make their monthly mortgage payments with The Huffington Post reporting as recently as May that one in three homeowners owe more on their homes than what they are currently worth.
Some homeowners have little to no prospect of ever catching up with their loan payments, a foreclosure is a real possibility. If you’re wanting to avoid foreclosure, you might want to consider a “short sale” a process where your home is sold for less than what you owe the bank. A short sale won’t preserve your credit, but if successfully completed it can relieve you of a tremendous financial burden, namely costly home ownership. Read on to learn more.
1. Speak to a financial professional. State laws vary when it comes to short sales. Some states hold homeowners liable after the sale, requiring them to make up the deficiency or short fall between the selling price and the loan balance.
Consult with a financial professional who is well-versed in real estate matters, preferably an individual with a background in real estate law. This person can explain to you your options including allowing your home to go into foreclosure or filing for personal bankruptcy.
2. Hire the appropriate real estate agent. With a short sell, you don’t want to deal with just any real estate agent. When the housing market plunged in 2007 and 2008, some agents received additional training in handling short sales and foreclosures.
Ask your agent if she is familiar with short sells and what experience she has with this method of selling. She should be candid with you, explaining her experience and detailing how many homes eventually were foreclosed. Ask for references and call these individuals to learn more about their experiences.
Bringing a short sell to completion is challenging with only one in three ever being accomplished — Bankrate.com puts the success rate at just 20 percent. If your agent’s track record is near the norm and she has the experience, then consider her services above the agent with none.
3. Know your home’s current value. Local markets can fluctuate in price. Your home may have gained or lost value in recent months, but the only way you can confirm this is to compare it with homes that have recently sold in your area that are of similar size.
You may also need to get a fresh appraisal to pinpoint your home’s current value. That information is important as your bank will want a price as close to its true value. Remember: your bank will lose money with a short sale — you need to build a case that your home is selling for market price, otherwise your bank could hold up is sale.
4. Market your home. With all of the information now available to you, put your home on the market. That price should be at or just above market value, to give yourself some room to negotiate.
By setting your price near where the home is valued, your bank will likely approve an offer that comes in near that price. The bank isn’t required to accept any offer, but it may entertain an offer that is reasonable.
5. Prepare your documentation. Once a solid offer has been received, you will need to prepare documentation to go to your bank for review. Your lender will explain to you what is needed, but plan on submitting personal information including your recent pay stubs, tax returns, a hardship letter and related forms.
Make certain that your documentation is in order and completely meets your lender’s requirements. You won’t get an answer in the next day or even the next week; most responses take at least 30 days with some coming in as late as 90 days. Your buyer, of course, may end up moving on to another home.
6. Expect to negotiate. Never assume that the market rate offer for your home is acceptable to the bank. You may have quit making payments months ago, but your home’s value may have changed in the intervening months.
Lenders may hold off on a short sell if they believe that a better price can be had. Your offer may not be rejected, but a counter-offer could be made. At this point, you will need to check with the buyer if he is willing to pay more for the home. If not, the deal may be over. If so, then there is room to bring the short sell to completion.
A short sell is hard work and can fail more often than it succeeds. Still, if your local market conditions are weak, a lender may be willing to accept your best offer. Be thorough in your preparation to ensure that the best deal is offered. And, keep in mind that once your home is sold, you’ll begin the lengthly process of repairing your tarnished credit history.