Short Sales - What to do if you are upside down on your home

In today's economy, many homeowners are faced with a problem:  They need or want to sell their home, but they are not able to clear enough from the sale to pay off their mortgage.  This can be the result of some or all of the following factors:

• The homeowner has refinanced, or taken out a second mortgage.
• The loss of a job, or a cutback in hours or income, has made it difficult to keep up with payments.  Often the financial setback is caused or accompanied by a serious health problem.
• The homeowner financed the home with a small or no down payment, and they've not lived there long enough to pay the mortgage down significantly.
• The decline in home values has eaten up the equity in the home.
• Maintenance has been skipped or delayed, causing the property to deteriorate.

Some of these circumstances may be completely beyond the ability of the homeowner to control, while others are the direct result of poor planning or decisions.  Regardless of the cause, once you're in that situation, it doesn't matter how you found yourself there.  The question is, what do you do to get out of the hole?

While it may not matter why you got upside down, your particular circumstances will determine what you can do next.  You may have one or more of the following choices for action:

1. Do Nothing.  If you don't have to move, don't move!  Even if your home is worth only half of what you paid for it, so what?  Unless you need to sell it, your loss is only theoretical until you actually have to unload it.  If you don't need to get out of town, and you are able to keep up on the payments, you are probably best served by just staying put, making the payments, and waiting for the market to improve.  When it does, you can get out from under the mortgage without digging too deeply into your pocket.
2. Increase your income or reduce your expenses.  If you're in trouble because your hours got cut, try adding a part-time job.  If that doesn't work, reduce your monthly obligations.  Sell a car, cut back on cable TV or internet service.  If you work at it, you may be able to save enough to enable you to keep up on the mortgage.  Focus on building savings or paying down your mortgage, to put it back in line with current property values.
3. Talk to your bank.  Guess what?  They don't want your home! They'd like you to keep your home, and work on getting your payments back on schedule.They may be able to lower your interest rate, or even allow you to just make interest payments until you get back on your feet.  The worst thing you can do is to just fall behind on payments without talking to your lender - do that, and you'll lose it for sure.  See what they can do for you.
4. Sell your home, and pay the extra money it takes to close the deal.  Do you have some assets you can sell or borrow against to get cash to close?  Check with your mortgage holder or local bank to see if you can take a personal loan.  As disappointing  as it may seem to borrow money to sell your home, remenber - it is your responsibility.  You owe the money, and you have an obligation to pay it back if you're able.
5. Give the bank title in lieu of forclosure.  This means you'll turn the house over to the lender, without them going to the expense of the foreclosure procedure.  Sometimes - not always - a bank will do this in order to mitigate their loss.  The down side is, it is likely to have the same effect on your credit rating as a foreclosure.
6. Pursue a short sale.  A short sale just means you sell your home, and your lender agrees to accept less than the full payment of your mortgage.  Why would a bank go along with that?  Because it saves them money to clear these loans without going through the foreclosure process.  The advantage to the seller is that, while you'll still take a hit to your credit rating, it won't be as bad as a foreclosure.  You'll also have the satisfaction of knowing you've done what you could to mitigate the bank's loss.

Not every homeowner is a candidate for a short sale.  The following are characteristics of someone who stands the best chance of getting approval for s short sale:

• Some circumstances have caused him to get in a financial hole. Loss of job, serious illness, divorce, legal problems, or a similar personal difficulty has made it impossible to continue to live here.
• A forced move out of the area means he can't stay in the home.  Just wanting a different home is not an acceptable reason for you to not pay your home off.  If you've lost your job and have to move out of state to find work, that may be your only choice.
• No other other options are available.  Don't expect the bank to take a short sale if you have cash or other liquid assets.  They aren't going to let you get by that easy!
• The homeowner is willing to ask the bank to take a short sale, and they're persistent enough to follow through and keep pushing for a resolution. If you're too shy or embarrassed to ask, you won't get what you want.

OK, so a short sale is your only option, and you fit the profile of the short sale candidate.   How do you go about making it happen?  The good news is, it's not difficult - just tedious.  Here is the basic process:

• Talk to your lender.  Get your most recent statement, and call them up.  Explain your situation, and tell them you need to pursue a short sale.  Don't expect them to approve it now - you're just getting the ball rolling, getting a jump on the process.  Keep in mind, their goal at this time will be to make this hard for you - they really want to get all their money!  Be patient, but persistent - your leverage is their desire to minimize their loss.  They may ask for some documentation, and have some forms to sign, that's normal.
• Pick a realtor with experience in short sales.  Virtually every lender will want you to have a realtor to market the home.  They will probably want a Comparative Market Analysis or a Broker's Price Opinion to give them a good idea of the home's value.  The banks understand the value of a realtor, and they'll negotiate a commission - to be paid by the bank - with your agent.
• Put the home on the market at an aggressive price.  Your job is to try to maximize the price, while getting the home sold in as short a time as possible.  A short sale is a pain for a buyer, so they'll want to buy it at the low end of its value.  Don't, however, accept an offer that is too far below the fair market value - by doing so, you'll just set yourself up for failure when the bank won't approve it.
• Once you have an offer, and accept it, your realtor will present it to the bank.  Expect the bank to take some time to evaluate the offer - most take between 6 weeks and two months, but I've had them take as little as 2 weeks, and as long as 7 months.  
• When the bank approves the sale, they'll have an addendum to sign.  One of the requirements is that the sale is "as is" - they should also have a statement that they release you from your debt obligation.  Read it carefully, and get legal advice if you're not comfortable with anything.  Most banks are reasonable when it gets to this point - the decision has been made, and they just want to get it done.    Be prepared to move fast once they say OK - they'll usually want to move as fast as possible at that point.

Many people have been faced with a no-win situation - they can't afford to live in their home, but they can't afford to sell it, either.  If you're in that position, don't panic, and don't feel ashamed.  Do what you can to get out of the hole, and start putting your financial life back together again.  A short sale isn't always your best solution, but if it is, make it happen.