5 Reasons to Short Sell Your Property
Avoiding Foreclosure and 4 Other Short Sale Benefits
Various factors can cause a homeowner to owe more on their property than it is currently worth. Regardless of the reason you are underwater, short selling your property could actually allow you to regain some of your financial freedom. For those who are experiencing hardship, being able to get rid of a bad investment can be live changing. Here are five reasons you should consider a short sale.
Reason # 1. Avoid Foreclosure
For people who are experiencing hardship, negotiating a short sale on your property can help you avoid foreclosure. While both foreclosures and short sales stay on your credit report for seven years, foreclosures have a much more negative impact on your credit score, interest rates and ability to get a loan.
During a short sale, you are still the owner of your property. Your goal is to convince your lender to accept less than you currently owe on the loan, but the lender is not yet the owner of the home. You are the one who is trying to find an interested buyer for the property.
In a foreclosure, the lender takes possession of your property. The lender is the one who is trying to find a buyer for the property so that they can recover whatever money they can on it. If you can get a short sale accepted and closed on your property, you can avoid losing your property to foreclosure.
Reason # 2. Get Out From Underwater
Negotiating a short sale on your property can allow you to get out from underwater. For example, you bought a property for $400,000, but in today’s market it is only worth $230,000. If you took out a 30 year mortgage on the property and put five percent, or $20,000 down, you have a $380,000 loan on the property. Even if you have owned the property for five years, assuming you make the minimum monthly mortgage payment, you still owe more than $300,000 on the property, which is significantly more than the current value of $230,000.
Since no one would be willing to buy the property for $300,000 in the current market, you can try to negotiate a short sale. By short selling your property, you could get the bank to accept closer to the current $230,000 value for the property. You can then negotiate with the bank to be released of the liability for the additional debt or you may have to work out a payment plan with the lender for the remaining $70,000 that you owed.
Reason # 3. Bank May Forgive Your Debt/Release of Liability
When you are negotiating short sale terms with your lender, you should try to get them to agree to a release of liability for the remaining debt owed. This means they will not try to pursue a deficiency judgment against you for the difference between what the lender received for the short sale of the property and the amount you actually owed. Make sure to get this in writing.
Even if they do not release you of the full amount you owe, the lender may be willing to hold you accountable for less than you owed. For example, if you still owed $70,000, they may be willing to accept $10,000 paid to them over monthly installments.
Reason # 4. May Avoid Negative Reporting to Credit Bureaus
When you are negotiating the terms of the short sale with your bank, you can try and get them to alter the way in which they report the short sale to the credit bureaus. A short sale will typically be reported on your credit as a “settled” debt. Credit bureaus view this term negatively because it means the lender settled and accepted less than what was originally owed to them.
The impact on your credit score will vary greatly based on if you have actually missed any mortgage payments and on your individual credit history. Your credit score could drop by as little as 40 points or as much as 200 points.
Your goal is to get the lender to report the short sale as a “paid” debt on your credit report. If you can get the lender to agree to this, there will be no negative impact on your credit. Of course, they may reject this request, but it does not hurt to ask. Lenders may be more willing to report a short sale as paid in full for individuals who have never missed a payment and have a great credit score to begin with.
Reason # 5. Easier to Get a New Loan
If you go through a short sale and the lender has reported it to the credit bureaus, by no means will it be simple to obtain a loan for a new property. However, lenders are much more lenient when they see a short sale on your credit history than they are if you have a property that was lost to foreclosure.
Every lender has different standards, but foreclosures will usually affect your ability to get a mortgage for five to seven years after the foreclosure. Short sales will negatively affect your ability to get financing for anywhere from two to three years after the short sale. If you are able to get a loan before then, you may be faced with stricter borrowing terms, such as higher interest rates. Seeking financing from private lenders is always an option as well.
Next: Cons of Short Selling Your Property