The number of homeowners that are underwater (have a mortgage balance that exceeds the value of their home) has declined significantly, however their are still many homeowners out there that are underwater, can’t keep up on the payments, need to sell but don’t have the money to bring to closing to make up the difference. So, if you find yourself in this situation as a homeowner, what should you do? Assuming you have exhausted all other options you have to reduce your loan or payments to the point where you can afford it, then a short-sale may be your last alternative to foreclosure.
The question is when should you consider doing a short sale? According to Freddie Mac, a short sale may make sense if you:
- Do not qualify for any options to keep your home, including a loan modification, forbearance, or reinstatement.
- Need to move in order to keep or obtain employment.
- Don’t think you could sell your home at a price that would cover your outstanding mortgage amount.
So why mess with a short sale versus just walking away and let your lender foreclose? While there are situations where a short sale won’t work, or isn’t possible and the only alternative may be to “walk away”, there are risks with walking away form your home and mortgage. I’m not going to focus on that now but instead the positives of doing a short sale instead, which include:
- You are doing the “right” thing. I guess one could argue the right thing would be to pay the loan in full, but if that is not possible due to circumstances beyond your control than I think the right thing is a short sale as it is much less damaging to your lender (and you) than a foreclosure in a many cases.
- Typically a short sale will not damage your credit as bad as a foreclosure will.
- You will probably not have to wait as long after a short sale to be eligible for a home mortgage again as you would if you had a foreclosure
- You may be able to negotiate a release of your obligation to repay the shortfall, thereby protecting you from possible future liability (in some states this is a moot point as lenders are not allowed to sue a homeowner for a deficiency on their primary residence…consult an attorney to find out what your potential liability may be and what recourse your lenders have in your state)