Today's housing market is working its way through a hangover. Following the freewheeling, party days of lending mortgage dollars to anyone and everyone, lenders are finally pulling back. As the money supply tightens up, housing values are getting hit hard.
Tough times call for drastic measures
For homeowners who can continue to meet their monthly mortgage obligation, the logical strategy in these tough times is to ride out the cycle. But if cash flow issues are turning your mortgage payment into an impossible burden, you'll need to look at other options. First, consider a mortgage refinance. Your lender might help you by restructuring the debt, as long as your home's value hasn't dipped below your mortgage balance. If you owe more than the home is worth, you might be stuck choosing between a foreclosure and a short sale.
Inside a short sale
When you sell short, you sell your home at market value and turn over the sales proceeds to the lender. The lender then pays off the real estate agent, and cancels your mortgage obligation.
Lenders can take big losses on short sales. Consider a home that was 100 percent financed for $500,000. With a 10 percent dip in value, the home would be worth $450,000. After selling the home and paying an agent's commission and other fees, the lender will get back less than $450,000 of the original $500,000 it loaned.
Still, the short sale might be the lesser of two evils for the lender and for you. Lenders don't like to get involved in foreclosure; it's very messy and time-consuming. After using an inordinate amount of resources to wade through the legal necessities, the lender still has to sell the home before it sees any cash. A short sale, on the other hand, allows the lender to cut its losses and get out faster.
You'll benefit from avoiding a foreclosure, too. Your credit history will be bruised somewhat from any missed mortgage payments and the short sale itself. But the marks left behind won't be as damaging to your credit score as a foreclosure would be.
Moving forward on a short sale
If your mortgage obligation becomes impossible to meet, open the lines of communication with your lender as soon as you start missing payments. If you address the problems early, you might be able to refinance the debt and keep your house-by far the best solution for everyone involved. If refinancing won't work, team up with a real estate agent who has experience in short sales. The agent can help prepare you for gaining your lender's approval to proceed with the short sale.
This is undoubtedly a stressful situation for you. Just remember that your lender is reeling too, and neither one of you has the option of sleeping it off.