Even if you have been financially responsible for years, you may now be at risk of foreclosure with a poor credit rating that makes it impossible to refinance your home to lower your mortgage payments. To make matters worse, you may be “underwater” on your home because of added debt from a second mortgage that diminishes your equity. Falling property values have the same effect. If you live on Long Island or in the five boroughs, you can get out of this situation without going through a foreclosure that imposes severely damaged credit for years to come. With a short sale, you can settle your mortgage debt and get a fresh start in life, even if your credit is bad.
What is a Short Sale?
A short sale occurs when you sell your house and you end up “short” on paying off your mortgage balance to the lender. You may be pushed into a short sale to avoid foreclosure because of financial troubles beyond your control. Divorce, unexpected medical bills or the loss of a job are common causes of financial distress. An unfavorable local real estate market adds to the problem by making it impossible to sell at a price that will pay off the mortgage, even if you have built up equity in your home over the years.
You need the approval of the bank to accept a short sale offer. Most banks will only be willing to accept a short sale if you provide basic documentation of financial hardship and bring in a reasonably priced offer from a qualified buyer that is close to the price of comparable sales. With a short sale, you work with a realtor just as you would with any traditional property sale instead of dealing with the bank’s lawyers in a contentious foreclosure proceeding. In some cases you may be eligible to receive money for relocation to a rental or a rent-to-own property.
Why Choose a Short Sale?
If you have bad credit, other options may not be open to you. Banks will not agree to refinance your mortgage if your credit rating is below a certain level. They may also refuse reinstatement, a repayment plan or forbearance where you would bring your missed mortgage payments current. Even if the lender does agree, you may not have enough funds to take advantage of these options. In the end you would have the same unaffordable monthly mortgage payment you started out with. If you have bad credit and insufficient income, the bank will likely refuse to offer a loan modification with a lower interest rate and/or reduced monthly payments.
You may not be able to change an unaffordable Adjustable Rate Mortgage to a Fixed Rate Mortgage with bad credit, unless you go through a government loan modification program like the Fannie Mae Flex program. Be aware that with a loan modification, you may actually wind up in a worse financial situation than when you started because you are likely to owe more than the house is worth. The only other alternatives are foreclosure or a short sale.
How a Short Sale Affects your Credit
A short sale is significantly better than your other alternative, foreclosure. It will stop the bleeding in terms of long term credit damage. Falling behind and missing mortgage payments is what significantly hurts your credit score. A short sale stops that from happening any longer and gives you the opportunity to potentially buy a new home in only two years. In a short sale your credit score may drop. In most cases it is a necessary part of being able to stop the further credit damage and start to re-establish your credit. However, in a foreclosure your credit score can drop up to 400 points and it can take four to seven years to become eligible for a home loan again.
Benefits of a Short Sale
A short sale can be a win-win-win situation where you, the homeowner, the bank and the buyer can all get a great deal. As the homeowner you can get out of an unaffordable mortgage and move on to a fresh start, free of mortgage debt, the bank does not have to undergo a costly foreclosure proceeding and end up with a house to sell. The homebuyer gets a good deal. A short sale does not cost you anything. You get to create a personalized timeline and move on your own terms in as little as 90 days or longer depending on your needs and situation.
With a short sale, your entire mortgage is satisfied in full so you walk away without owing anything, no matter how much is left on the balance. You are also entitled to free legal representation where you pick the lawyer and the bank will pay. As soon as the short sale is completed, you can start to reestablish your credit and qualify for a new mortgage within two years so you can move on with your life in a more affordable home.
Ten frequently asked questions about short sales
Getting the Advice you Need from a Short Sale Specialist
Realty Warehouse can give you the advice you need if you have bad credit and you want to do a short sale to avoid foreclosure. We may be able to help if you are underwater on your house and have no money to move. Our representatives specialize in helping homeowners avoid foreclosure on Long Island and in the five boroughs of New York City by helping homeowners weigh their options, find alternatives to foreclosure and achieve the best possible outcome. Realty Warehouse enjoys an A+ accreditation rating from the respected Better Business Bureau. You can count on us to listen to your specific situation, offer the advice you need and provide effective alternatives in a stressful situation.
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This blog is for informational purposes only, subject to change.