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Have you ever known anyone who has become behind on house payments due to some kind of hardship? I’m not talking about spending too much, but a hardship like a death or a spouse, job loss, divorce or a major illness. Before considering bankruptcy or having the bank foreclose on the property, consider what is known as a short sale.
A short sale happens when an owner is behind on payments and the house is worth less than what is owed. A lender may agree to a short sale, agreeing to accept less than what is owed. In order for a short sale to be agreed upon, the home owner must prove a hardship situation to the lender. Other things the lender will require include 2 years of tax returns, a financial worksheet, bank statements, pay stubs and a few more items.
What we’re seeing in the Austin area is a trend that we do not like. For the second quarter of 2006, the Austin market had 2.5 times the national average for foreclosures on homes. Why is this? Back in 2001, our real estate market collapsed. People who bought before the collapse in many areas in and around Austin are still in homes that have loan balances higher than the current market value of the home. Anybody owning one of these homes who is facing a hardship could be facing a foreclosure.
Another leading cause of being upside-down on a mortgage is because of creative lending. Being upside-down simply means owing more than the home is worth. Many people facing foreclosure have adjustable rate mortgages. When interest rates rise, so do payments and it is difficult for many people to make the additional payment. Other loan programs have allowed people to buy putting no money down. Other loans have even offered greater than 100% financing. So if there is a financial hardship and owners get behind on payments, they very well may be upside-down with the lender.
There are distinct advantages for a home owner in doing a short sale versus being foreclosed upon or declaring bankruptcy. A bankruptcy is very bad on a credit report. What most people don’t know also is that a lender can still come in and foreclose on a home even if it is a homestead and the seller has declared bankruptcy. A foreclosure is even worse on a credit report than a bankruptcy. With a short sale, the only penalization on the credit report is for the missed payments.
How can a home owner recognize if the lender may foreclose on the home? The first thing that usually happens when someone becomes behind on payments is a letter from the lender stating that the seller is in arrears. The big warning signal is getting a letter from a lender stating that unless payments are brought up to date by a certain time period, they will accelerate the loan. This means that they are going to call the entire amount owed due.
If a home owner is facing a financial hardship and falls behind, he should consider calling a REALTOR® to talk about the possibility of a short sale. An owner should make sure the REALTOR® has a good understanding of the short sale process before deciding to work with him or her. An experienced REALTOR® will have access to all the paperwork, the lender’s short sale contact information and can be ahead of the game in terms of contacting a lender before the lender starts foreclosing.
If you or anyone you know is facing a situation that might lead to a short sale, please contact me immediately at 512-293-2422.
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