The best way to describe most people’s financial circumstances right now is “fluid”. And by that we’re referring to the fact that 55 million Americans don’t have any savings, and only 29% of Americans have six months of emergency cash put away.
So, tens of millions of Americans are only a missed paycheck away from having to deal with collectors.
Finding yourself in a situation where you can’t pay your bills is upsetting, but it’s even worse when you realize that you can no longer afford to pay your mortgage.
In situations like this you might be considering a short sale on your home.
How does a short sale work?
A very quick explanation is that it is when you sell your home for less than its current market value. You do this because you can no longer afford to repay the full amount of your mortgage, for whatever reason.
How much less will your home sell for? That all depends on what your bank approves, and what buyers are willing to pay.
Short sales are far more common during a major economic downturn affecting the entire country, but that doesn’t mean they don’t happen outside those times.
It’s also not as easy as the owner of a property deciding that they’re going to “short sale” it. Your lender needs to approve the sale, and they’ll only do that if you can prove to them that it’s in the best interest of both the lender and the mortgage holder to take this route.
A short sale allows a bank or other lender to recoup at least some of the money they’re owed, which is usually a better option for them than foreclosure. Although if they stand to make more profit from a foreclosure, then they’ll pursue that path instead.
Does a short sale hurt your credit?
The quick answer to this is “Yes, a short sale does affect your credit rating”. Lenders have to report this type of property transaction to the major credit bureaus, and although the terminology varies from one to the next, they all view it as the same thing “Loan not paid in full”.
What are the advantages of a short sale?
The most obvious benefit is that you can immediately offload a huge life expense. Your mortgage is (or should be) your single biggest outgoing each month. If it’s not, then we would suggest speaking to a financial advisor because you may have money management problems.
Not having to struggle to repay your mortgage should give you room to breathe, especially if you can live with somebody else on the short term.
A short sale is also less damaging to your credit rating than a foreclosure, so your FICO score shouldn’t take as much damage.
What are the disadvantages of a short sale?
The first and most obvious issue is that you will have to find somewhere else to live. This means renting, sharing or possibly moving back in with family or friends. There’s nothing to be ashamed of here because you’ll have time to regroup, fix your finances, and get your life back on track again.
There’s also no guarantee that your lender won’t pursue you for the difference between the amount the house sold for, and the remaining balance of your mortgage. This is called a deficiency, and although they’re rare, they can happen.
And finally, you won’t make any money from the short sale, so you’ll have to accept that you’re taking a significant financial loss by short selling your home.
Summary
A short sale offers you an immediate solution to a worrying problem i.e. not being able to pay your mortgage.
Just be aware that the process is not without its downsides, so always seek professional legal and financial advice in these situations.