I was asked by one of my clients who is thinking about doing a short sale if they should just stop making their payments. This is a very difficult question to answer for anyone, and I can’t answer this question as a real estate agent.
This question should be asked when talking to your accountant, a financial advisor, or your attorney. What I can do is, give you some scenarios that can happen if you stop making payments during a short sale. (These are some hypothetical scenarios! Please consult an accountant or attorney.)
Should You Stop Making Payments During A Short Sale?
This question should be answered with another question. Are you willing to go through a foreclosure? A short sale is not a guaranteed sale. Your home selling in a short sale is based upon many factors and you never know what the bank will do.
If you receive an offer on your short sale it doesn’t mean the bank will approve it. If the bank denies your buyers offer and the short sale is denied, this will leave you with backed up payments if you stopped making them.
If you can’t come up with the money to pay these payments, you will go into foreclosure. So, this is a personal decision. Are you willing to face foreclosure if your short sale doesn’t work out? Which could be very likely considering that only 20-25% of all short sales around the country close.
Short sales are difficult, emotionally draining, and time consuming. When you decide a short sale is the only way out, you need to be prepared for a foreclosure at anytime. It’s the nature of the beast.
Why You Should Keep Making Payments During Your Short Sale
If your short sale doesn’t work out, you can cancel without any penalties. If the bank doesn’t accept an offer you submit, you don’t get an offer, or the bank denies your short sale for any other reason. You will be in a much better situation then if you had stopped making payments.
Making payments will protect your credit. Although your credit may not be the most important thing for you to worry about during financial hardship, your score will not reflect late payments. However, the bank may report your short sale and the short sale itself could have an affect on your credit.
It is possible to purchase a new home directly following a short sale if you stay current. Both FHA and Fannie Mae have guidelines allowing a short sale seller who is current on payments to purchase a home directly following a short sale. Why would anyone do this?
If your home is worth dramatically less than what you paid for it, selling it short may be your only option. You may have to move for any number of reasons such as divorce, employment, or many other reasons. If your payments are up to date, you could purchase a new home when you move if you stay current.
Reasons To Stop Making Payments During A Short Sale
You may not have a choice in the matter. If you don’t have the money to make payments than you can’t make payments. Plain and simple. Other’s decide to not make payments by choice, and here are their explanations:
To save money for a move. It’s no secret that many homeowners are under water and feel they need to get out from under their current situation. They will stop making payments during the short sale process to save up money to move when the short sale goes through.
Lenders may not force you to make up the payments. Many times during a short sale, all missed payments are forgiven, but not all the time. If your situation allows you to not make payments and you don’t have to pay them back, you may consider not making payments. Banks still may file a deficiency notice however.
The short sale could be moved to a more critical time frame for approval. If you aren’t making payments, it would be in the banks best interest to close on your short sale as soon as possible to start recouping their losses. You don’t have to be in default in order to short sale, but someone who is making payments compared to someone who isn’t making payments may take priority.
If You Miss Payments You May Face Default
Many short sales do not get approved, never find a buyer, or are screwed up by inexperienced real estate agents. There is a very good chance that you may end up facing foreclosure if you stop making payments. Here are some of the drawbacks if you go into foreclosure:
Although both short sales and foreclosure affect your credit, a foreclosure is much worse. After short selling a home, even if you miss payments, you can purchase a home again within 2-3+ years.
If you go into foreclosure you won’t be able to purchase a home for 7-10+ years. Seven years if you don’t have any other credit issues, pay off all your delinquencies, and stay up to date on all future payments. Ten years or more if you face delinquencies or other credit issues related to your foreclosure.
If you’re facing financial hardships, please do not avoid the situation. It will not go away, and a short sale may be the best option. If you can’t make your payments, you can still sell your home in a short sale and avoid foreclosure. Be sure to talk to a lawyer, an accountant, and seek out an experienced short sale agent to give you advice on your personal situation.
Platinum Real Estate Group