A short sale occurs when you have an underwater property. Let’s say you bought a house back in 2005 for $100,000. You took out a mortgage worth $95,000. Now, after years, the value of your home is $65,000 and the outstanding mortgage is worth $75,000.
That means, even if you sell your home, you still cannot pay back the complete pending amount. This is an example only but there are thousands of properties in the country that are seriously underwater. Selling the home is not the solution to that problem. You cannot keep paying the mortgage because you’re investing in an underwater house and you won’t see an ROI for your loan payments.
What do you think is the solution to this issue?
Some people abandon their houses and move out. They think it’s the best possible solution but they are not aware of the consequences of a foreclosure.
Consequences of Abandoning Your House
Let’s suppose, if you sell your house now, you can get $65,000 and the pending mortgage is valued at $75,000. That’s a difference of $10k.
You understand that your house is underwater and you cannot come up with an effective plan so you leave your house and move away. On the same note, you stop making loan payments. As per the federal laws, the bank will start the foreclosure process after you miss 4 consecutive loan payments.
The home keeps sitting on the market, unprotected. In the best scenario, weather conditions and overgrown grass affects the value of your home. In the worst-case, your home becomes an opportunity for thieves and experiences a serious decline in value in terms of the loss of valuable equipment.
The foreclosure process takes time and it can take anywhere from 4 months to a year to complete a foreclosure sale of the house. If you don’t contest the foreclosure, it will take less time and perhaps the bank can auction your house in a few months only.
Since you have abandoned the house, you won’t qualify for mortgage assistance programs.
An abandoned house experiences a decline in value. Your house that was worth $65,000 might now be valued at $57,000 which creates a further loss for you.
A foreclosure is an expensive option for the homeowner. Attorney fees, late payment penalties, sale costs, and foreclosure charges are included in your bill. That means you might owe the lender another $5,000 in these fees.
An uncontested foreclosure case doesn’t go in your favor. The bank can pursue a deficiency judgment. That means, even though you have abandoned the house and the bank has foreclosed the property, you can be still responsible for the remaining balance. At this stage, the balance has increased by $13,000. You now have to pay back $23,000 to your lender.
Furthermore, you also have a foreclosure reported on your credit history which restricts you from obtaining a new loan for several years.
Compare the situation to the original scenario. You have a house and you need $10,000 to be free from the debt. Now you need to pay another $13,000 to be financially free.
Many homeowners assume that they have no choice since the house is already underwater. However, a short sale is a valid option. If you can negotiate a short sale, you can sell your home for $65,000 and the lender will accept that as the complete price for the property. You will be free from the debt and a short sale is less strict on your credit report.
If you find it challenging to pay the mortgage, please don’t abandon the house. Consult a real estate solutions company in your area so that you can find a way to pay for your house or if you have an underwater home, the best option is to negotiate a short sale with the lender.