Should We Stop Making Mortgage Payments to Do a Short Sale?
Question: Should We Stop Making Mortgage Payments to Do a Short Sale?
A reader asks: "Should we stop making our mortgage payments while our home is on the market as a short sale? We've tried to do a loan modification with our lender, but our application was denied because we were current. The lender said if we were in default, it would help us. But we owe so much more than our home is worth, I've lost my job and really can't afford to keep making payments. Can you help us?"
Answer: First, let me say my heart goes out to you. I talk with many short sale sellers in your position every day and realize the difficulty sellers face. In Sacramento, where I work, more than half of the sales in 2008 were short sales and foreclosures, and this situation is mirrored in many other parts of the country. You are not alone.
Nobody, outside of a lawyer, can tell you whether to stop making your mortgage payments -- especially not real estate agents, because we are not licensed to give legal advice. This is a personal decision that sellers need to make for themselves. There are consequences if you stop making payments. Here are a few things to consider:
Are You Willing to Go Through Foreclosure?
Typically, lenders will not authorize a short sale until the seller finds a buyer, but that status is changing. Realize there is no guarantee that a lender will accept a short sale, and not every lender is required to let you sell on a short sale.
If you begin the short sale process and stop making your payments, should the short sale be denied and you cannot make up the back payments, you may find yourself involuntarily losing your home through foreclosure. Many short sellers enter the process with the thought that if the lender won't approve their short sale, they are prepared to let the property go.
Advantages to Making Your Mortgage Payments During a Short Sale
If you can manage to continue making payments while your home is on the market, it may be advantageous for you to do so for these reasons:
- Qualify to Buy a New Home.
Fannie Mae guidelines, issued in August of 2008, say a borrower may immediately buy another home after a short sale if the borrower was never delinquent, complies with its "excessive prior mortgage delinquency policy," and is not obligated to repay the short sale lender, including a deficiency judgment.
It's hard to find a lender who will do it, but there are smaller banks with their own portolios who don't sell to Fannie Mae and may consider such a loan. On the other hand, FHA guidelines say if the buyer was never late, FHA will make a loan immediately after a short sale. HAFA 2013 guidelines allow lenders to report Paid in Full, so that makes a big difference on a credit report.
- Protect Credit
Keeping your mortgage current also helps your credit rating because your credit report will not reflect any late payments. Realize that a lender may, however, report your short sale as a Credit Score Factor Code #22, which will still somewhat drop your FICO.
- Peace of Mind
Not falling behind on your payments makes it easier for some sellers to deal with a short sale because the stigma of being delinquent is absent, and they sleep better at night.
- Cancel Without Penalty
If your home does not sell or a lender refuses to accept an offer from your short sale buyer, in California, for example, you are free to cancel the listing and keep your home without liability.
Reasons to Stop Making Your Mortgage Payments During a Short Sale
Some sellers are dealing with extreme financial hardship and don't have the option of deciding whether to continue making mortgage payments. Other sellers deliberately stop paying.
- More Motivation for Banks to Accept Short Sales
Although it is not necessary to be in default before a bank will consider a short sale, the files that get priority are those in default.
- Lenders Might Not Obligate Repayment
You can't squeeze blood out of a beet, although I know banks that have tried. Typically, if a borrower is facing a true hardship and has no assets nor means of making a mortgage payment, the lender is unlikely to try to force the borrower to pay back any of it. It does not mean a lender is not entitled to a deficiency judgment, if circumstances warrant.
- Acquire Funds to Move
It stands to reason that if you're not paying the bank, money that would ordinarily be allocated toward that expense may instead be used to pay first, last and a security deposit on a rental.
Drawbacks to Going Into Default During a Short Sale
There is no free lunch. While some sellers are happy to walk away from a home in foreclosure, others would prefer to complete a short sale and dread the thought of a foreclosure.
- Credit Report Could Suffer
Short sales and foreclosure affect credit. In addition to a Credit Score Factor Code #22, the lender may also report your delinquent mortgage payments to the credit bureaus. Some lenders can report a short sale as paid in full if you've completed a HAFA short sale after 2013, which should not affect your credit.
- Restricted From Buying a New Home
Although I expect restrictions may become relaxed a bit due to the increasing number of foreclosures and short sales, at the moment, borrowers with a 60-day-late-pay or greater are required by Fannie Mae to wait two years to buy another home. Golden 1 Credit Union in California offers a case-by-case waiting period for borrowers who fit certain criteria. Certain HAFA guidelines allow an immediate repurchase. Talk to your agent.
- Lose Home to Foreclosure
If you can't make up the back payments prior to the trustee's or sheriff's sale, you may lose your home to the bank.