Many homeowners who struggle to make monthly mortgage loan payments end up losing their homes to foreclosure or even filing for bankruptcy. Before you go either of those routes, however, consider one alternative that could end your financial distress and allow you to move forward and begin repairing your credit: a short sale.
What is a short sale?
A short sale occurs when your mortgage lender agrees to accept less than what is owed on the mortgage to settle your obligation. There is no guarantee that you'll get approved for this type of deal, but if you are desperate to get rid of your mortgage, it can't hurt to ask. Mortgage lenders who agree to a short sale are do it to minimize losses and avoid foreclosure.
Getting to a deal
You should expect to spend a fair amount of time on reaching a short sale deal with your mortgage lender. It could take several phone calls before you actually reach someone who can get you moving on a short sale. Be persistent and don't become discouraged if it appears that your request is going nowhere.
Once you have the right contact, you'll be asked for a lot of information and it is crucial that you provide it in a timely manner. Among the items you will be asked for:
- A hardship letter that details why you are unable to pay your mortgage. Make the hardship letter as straightforward as you can and be ready to provide proof to back up your claims, such as high medical bills or unemployment.
- Information about your property, such as the outstanding mortgage balance, your monthly payments, and how you've marketed it. Short sales generally are not approved if you haven't tried to market the home at a higher price or with a professional agent. You'll also be asked to provide the property's approximate value.
- A statement of income and assets. You'll probably be asked for paycheck stubs, income tax returns and statements for bank accounts and other investments.
- A market analysis will give a better idea of what your property might fetch in the current housing market. A real estate agent or appraiser can help you pinpoint a value for your property.
Do you already have a buyer?
Having a buyer already lined up for your property could help move the process along more smoothly. Let your mortgage lender know if there is purchase agreement for your house. You'll be asked to provide a copy of the agreement as part of the approval process.
Forgiven mortgage debt
Once a short sale is approved, the mortgage lender will forgive some of your debt. However, you'll owe taxes on the amount of forgiven debt. For example, if you have a mortgage balance of $200,000 but the lender agrees to accept a $140,000 layoff in a short sale, you could end up owing taxes on the $60,000 of forgiven debt. Consult with an attorney or tax advisor to get all the information you need about how a short sale would impact your finances.