While many homebuyers purchase with the foreseeable future in mind, it’s safe to say that few people buy a house with the expectation of one day facing foreclosure. But life can take unpredictable turns, and whether the intention for living in a home spans a few years or several decades, no one anticipates finding themselves underwater on their mortgage.
Sometimes, missed mortgage payments can be remedied with a phone call and a bit of paperwork. Between forbearance programs and loan modification options, if you’re behind on payments by just a couple of months and only need a moment to breathe before your financial situation improves, it’s often possible to find a solution that will allow you to keep your home by talking with your lender — especially if there’s equity in the property.
If things are more urgent, such as when a public notice of default has been issued and you’re now in preforeclosure, or if the amount owed on your mortgage exceeds what the home is worth, it doesn’t take long to feel backed into a corner. Though options may be limited when you’re upside down on your home, getting the lender to agree to a short sale can bring much-needed relief.
As for where you’ll go next? Well, that depends, but if you’re wondering if it’s possible to short-sell your house and buy another, you’re not the first to consider this quandary.
While it’s not impossible, it’s also not as simple as hopping from one closing table to the next. With the help of Jennifer Seeno Tucker, a top real estate agent in Elmont, New York, we’ll break down exactly what a short sale is and how this option impacts your ability to buy your next home.
What is a short sale?
You may already be familiar with the concept, but to recap, a short sale is when the lender agrees to the sale of a home for less than what is owed on the mortgage.
In these cases, there is typically little to no equity in the house, or you may even owe more than it is worth, and recouping losses would be difficult either due to the condition of the home, the current goings-on in the local real estate market, or some combination of both.
If a homeowner is in a situation where discussion of a short sale is on the table, foreclosure is a real threat. Being able to sell the house and walk away without owing anything further is often a big relief.
Short-sale transactions function mostly like a regular deal, though they can invite delays as the lender has to be involved, which leads to more back-and-forth between parties.
How does a short sale affect credit history?
According to both Equifax and Experian, short sales can do nearly the same damage to your credit report as a foreclosure. Though the lender will have agreed to a compromise on the sales price, the transaction will likely still be reported as either “settled” or “not paid as agreed.” Both line items mean that, in the eyes of the national credit bureaus, you ultimately did not uphold your end of the deal after signing your mortgage documents.
While major marks on your credit report can stay there for seven years, your credit isn’t necessarily decimated following a short sale. If your accounts are otherwise in good standing (and you continue to keep them that way), you may have a shot at another mortgage after just two years.
Credit score algorithms place more emphasis on what has happened during the past 24 months, so it’s possible that a lender will be willing to chat after the dust has settled.
What if you can’t make your mortgage payments?
Financial strain can arise through any number of circumstances. Whether due to job loss, a family emergency, medical issues, or some other unforeseen happenstance, few things are more stressful than realizing you won’t be able to make your mortgage payment.
If this happens, there are a few people you should have on your contact list.
Talk to your lender
Your first step should always be to contact your lender as soon as possible and explain the situation. Even if you only anticipate a month or two of problematic payments, it’s always in your best interest to be transparent and see if there’s any leeway for a late payment without penalty, a change in the date that your payments are due each month, or some other relatively minor but relief-offering solution.
Under the COVID-19 pandemic relief legislation, you may be eligible for temporary forbearance, which could impact part of or all of your payments. Just keep in mind that forbearance is not a payment forgiveness program; it only serves as a pause on having to make payments. You’re still ultimately on the hook for the full balance of the mortgage. At the time of this writing, coronavirus forbearance will be active through June 31, 2021.
If you are worried it may be more than a month or two, it’s also worth speaking to your lender to discuss options for loan modification or if to see if you might qualify for refinancing. Many homes have increased in value over the past year, and interest rates have been remarkably low. Depending on your situation, you may be able to refinance your home and not only keep it, but also save money in the process.
Keep in mind, though, that in order to refinance, you’ll still have to qualify for a home loan. So if your income and credit score aren’t in great shape, this option is unlikely. Likewise, if you’ve missed mortgage payments without a forbearance plan put into place, you’re unlikely to qualify for a refinance.
That’s why talking to your lender is so important. Even if you can’t refinance, they may be willing to provide you some form of loan modification that will allow you to stay in your home until you can get back on track.
You will also have to negotiate with your lender anyway if you are considering the possibilities of a short sale, so starting that conversation and discussing what options are available to you is something best done sooner than later.
Talk to a real estate agent
If your situation is such that forbearance or refinancing are implausible solutions, it’s time to contact an expert.
An agent can help you determine the market value of your home as a first step toward deciding what to do next — and this could bring about some much-needed good news.
“If you’ve been keeping up [with payments] until COVID-19, there may be an opportunity,” says Tucker.
“In my local market, we’ve seen an almost 6% rise in home prices, and that can be the difference in a homeowner walking away with tens of thousands of dollars instead of walking away with nothing. In this market, people may not realize they have equity in their home.”
An experienced agent will be able to share the latest information on what’s happening in the neighborhood and how your home is likely to fit into current trends. When you’re facing the possibility of a short sale, it’s important to gather as much knowledge as possible.
Talk to a financial advisor
In the spirit of gathering information, it can’t hurt to speak with a financial advisor to discuss your options from multiple angles. Especially if you have savings, bonds, or investments that can possibly be tapped to bring your mortgage back up to speed, it’s worth exploring all avenues with a financial professional.
Further, you should understand that your mortgage lender may not approve a short sale if you technically have funds available elsewhere. Short sales aren’t meant to be a get-out-of-jail-free card, so you’ll need to submit a hardship letter and be able to prove that your income and assets are not sufficient to satisfy your mortgage. A financial advisor can help you suss out your net worth and put together key details.
Approach a short sale as a last resort
Once you’ve reached out to everyone who can offer advice or potential solutions, the reality may be that a short sale is, in fact, your best option.
In a true short sale, you won’t make a profit on the sale of the home; all proceeds will go to the lender. This is why it’s so important to tap the expertise of a real estate agent first, because a hot seller’s market could mean there’s demand for your home that you didn’t even realize and knowing your home’s approximate value also puts you in a strong position if you need to go to your lender to discuss the possibility of a short sale.
So, you sold your home in a short sale. Can you buy again now?
As noted earlier, if your lender reported the short sale as anything other than “paid in full,” your credit history now carries a metaphorical red flag for at least two years.
How the short sale will be reported is something you can try to discuss with the lender as the process is happening, but even if your specific representative is a kindhearted individual, their hands will likely be tied to policies that they hold no power to override. If rules require the reporting of a short sale with a terse “settled” or “not paid as agreed,” there’s little hope of arguing.
What you can do in the meantime, however, is make sure that your other accounts — credit cards, auto loans, student loans, utility bills, mobile phone, and so on — remain current and in good standing. As your financial situation improves, you can start to save for a down payment and, in combination with an otherwise gleaming credit report, potentially be able to secure a new mortgage in time, even if your credit score has taken a dip.
Tucker recommends proceeding with a short sale rather than letting a home go into foreclosure whenever possible.
“A short sale is really the best way to go as opposed to foreclosure because you’re able to recover after two years and purchase your next home,” she says. “Do the short sale and then wait those two years and see where your credit is at. After year one, you might look to some sort of credit repair specialist to see what makes sense.”
So, while it’s unlikely that you can sell your home via short sale today and buy another home tomorrow, it’s not the end of the road. Take this time to get back on your feet, refocus, and move forward.
“It’s okay,” says Tucker. “Things happen, and we move on from them.”
Header Image Source: (Matt Hardison / Unsplash)