How a Short
Sale Can Stop Foreclosure
No one wants the stigma
attached to having a home repossessed by the lender through foreclosure,
or the black mark left on ones credit history for every creditor
to see in black and white. And it can stay there for as long as
10 years no less.
Although essentially
similar in process, for a homeowner to stop foreclosure in Houston
the state laws may be slightly different for another city. Many
homeowners who bought around the top of the market, back in 2004
through 2006, are now stuck with having purchased more home than
they could afford. Through the ease of obtaining exotic adjustable
rate mortgages during those years, homeowners found themselves over-encumbered
with debt, having financed as much as 110 percent of the sales price
of their home.
As a result, they are
now finding themselves with a monthly payment that is unaffordable
as interest rates adjust to higher rates, thus bringing the new
payment to as much as 25 to 50 percent higher than the initial payments
they made.
Now they are left looking
for a way out of a dire financial situation without the stigma left
over. For distressed homeowners one possible option is the short
sale. Selling a home via a short sale is a legitimate method for
stopping the foreclosure process, allowing the homeowner to get
on with life and without the ding to the credit record.
Whats the catch?
By definition a short sale is literally the sale of a home for less
money than is currently owed the lender on the outstanding mortgage
being foreclosed on. In other words the home is upside down
from a financial aspect. Therefore, the catch is that in order to
successfully conduct a short sale, the foreclosing lender has to
agree to it, essentially agreeing to accept less money than it is
owed on the loan secured by the house.
A short sale is not a
vehicle normally seen during a sellers market when multiple
offers are lining up at the door competing with each other for the
house. Short sales are most widely accepted during a buyers
market when home sales are dragging, home values are declining,
and inventories of available properties are growing to the point
that the lender basically is just throwing up its hands and saying
some money for the house is better than no money at all.
Lenders are not in the
business of owning real estate. They get upset when they have too
many properties on their REO (real estate-owned) books instead of
out in the market making it a profit through monthly mortgage payments.
Plus, the foreclosure process is not free. Every house they foreclose
on costs them thousands of dollars. So, in some instances, agreeing
to a short sale is in the lenders best interest.
And it is up to the homeowner
to convince the lender that this is one of those circumstances where
its better to fish and cut bait. Its a matter of numbers
and economics. The homeowner needs to demonstrate to the lender
hard numbers that will lead the lender to conclude that selling
via a short sale is going to benefit them more than the amount they
would garner from foreclosing on the property and then selling it
as an REO.
Keep in mind there is
one major downside to a short sale, however. As much as the lender
wants to keep the property off its books, it also wants the money
its owed. In many situations the lender will make it a condition
of agreeing to a short sale that the homeowner sign a promissory
note to make up all or part of the difference between the proceeds
from the short sale and the amount owed on the original debt.
Also, an important aspect
most homeowners dont realize when they decide to go the short
sale route, is that any amount of the debt that the lender forgives
is considered to be taxable income by the Internal Revenue Service.
The lender must submit a form to the IRS stating the amount of debt
forgiven, so the tax man can be waiting for the homeowner when April
15 rolls around next year if any of the debt was indeed forgiven.
So for homeowners looking
at all their options to stop foreclosure and save their home, the
first step should be to contact their lender right away to try and
negotiate a workout plan to temporarily lower payments, or to refinance
to a fixed-rate loan.
After those and all other
options have been exhausted, the next step might be attempting to
get the lender to agree to a short sale. If so, then before going
too far it is advisable to seek the assistance of a real estate
professional who is well versed in short sales. Not all real estate
brokers or sales agents know how to conduct a short sale or how
to work with lenders in negotiating one.
Bottom line: Whether
you want to stop foreclosure in Houston, TX or another city, dont
be afraid to ask a real estate professional if he or she has any
experience working short sales. If not, move on and interview until
you find one who has. Possessing a real estate license does not
make them an automatic expert in short sales. It calls for extra
training not all real estate professionals have.
Remember: you are paying
them to represent your interests and you want the most qualified
representation possible when it comes to stopping foreclosure and
saving your home.
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