When you cannot pay your mortgage because it is out of your reach due to adjusting rates, pay reductions, job loss, etc., then it’s likely you have been inadvertently placed on a track that will lead to foreclosure.
Foreclosure occurs when the bank takes your home back because you went too long without paying them. They do this because their money is tied up in your home, and you’re no longer profitable for them. The last thing a bank wants is to own your home. What they want is steady cashflow because they make money when they lend your cash to other banks. If they don’t get paid, they take your house, then they auction it off, and then they come after you for the difference.
The Auction
When the home is sold at auction, it brings less than market value, typically. This means that there’s a deficiency that you are responsible for. That’s the amount that you still owe on the mortgage above and beyond what the home brings at auction. Ultimately, this could lead to a law suit, a judgment against you, and some sort of lien or wage garnishment. Either way, the bank will come after you.
In the process, you lose. Your credit is destroyed, and you’ll be unable to borrow money for five to seven years. This is a bad thing.
The Short Sale
If you are headed down the road to foreclosure, consider attempting to sell the home before the foreclosure happens. In the housing industry, this is called a short sale, because you’re going to be asking the bank to accept less for the home than you owe. You’ll be short the extra cash. IT DOES NOT MEAN IT HAPPENS FAST. “Short” does not refer to the amount of time it takes to get approval from your lender to do this.
Why Sell Short?
Why the hell not? You’re going to foreclose, which is horrible for your credit, so why not attempt to reduce your deficiency by selling the home before the bank gets its hands on it. The lender is going to sell the home for less than market value, and there are attorney’s fees attached to it which means your liability after all is said and done will be greater than if you had a a REALTOR, someone like myself, list your home, market it, and get it sold for as much as possible.
We Don’t Choose Between Foreclosure and Short Sale
100% of the homes that are foreclosed upon have a mortgage. ALL homes that are headed towards foreclosure can be sold short of what is owed. When we speak of Short Sales, we aren’t comparing them to a Foreclosure and then choosing the best option. If you don’t pay your mortgage, you are on a time line of foreclosure.
A recent caller to the Dave Ramsey show had the idea that a “Short Sale” was a process applied to a financial hardship that was different than foreclosure. Here’s the difference. A foreclosure is the result of complacency. Don’t pay your bill, and your bank will boot you out of your house. A short sale is what you do to prevent a foreclosure, if you are unable to pay your bills.
A Short Sale Will Not Hurt as Much
It’s true. If your home is worth less than you owe, whether you can afford the payments or not, if you have to sell it, you have to sell it for less than is owed. If you don’t have the money to cover the difference, you will be required to get approval from your lender to release the home to a new owner. YOU HAVE A MORAL OBLIGATION TO PAY YOUR MORTGAGE PAYMENT. Walking away from the house is a breach of contract. Asking the bank to allow you to sell for less is not. The consequences to your credit, and your tax bill when you ask your lender to forgive you of the remaining balance after you have an offer on your house for less than you owe will make the difference between having a foreclosure on your record, with an inability to borrow for up to 5-7 years, and the ability to borrow within 2 years.
Don’t be a fool. If you’re headed towards foreclosure, try to sell short before the auction date. Your outcome will be much better.
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I never knew the difference between short sale and foreclosure. At least in terms of being the owner of the house and placing it on short sale/foreclosure. Thanks for taking the time to do this write up, its very helpful.
I think a lot of people should just do the short sale – why absolutely destroy your credit when you have the option to help yourself out by completing a short sale??? Doesn’t make sense to me.