Under the Cares Act, mortgage forbearance has been available to borrowers across the USA. A forbearance is an agreement between a lender and a borrower allowing the borrower to not make their mortgage payments for a period of time, with interest simply accruing.
Mortgage loans with government ownership/guarantees currently have guidelines which include extension of the forbearance through either January 31, 2021 or February 28, 2021. Conventional loan forbearance provisions have to be evaluated lender-by-lender. In general, this helpful intervention by the government and by lenders to help beleaguered borrowers has undoubtedly avoided a national financial crisis.
For borrowers nearing the end of their forbearance, it all now boils down to this: has one’s income been resumed or is the borrower unemployed or under-employed? The latter two scenarios unfortunately may necessitate a sale of the home. If the borrower is unemployed, then resumption of a modified loan or a refinanced loan may not be possible. That situation would also be the case if the borrower is under-employed at a level whereby they cannot afford their mortgage payment.
If the house has to be sold to satisfy the mortgage, then the question needs to be asked whether the realistic value of the home is enough to cover all closing costs and the loan amount. If the answer to that question is “No!”, then the borrower should examine an exit strategy centered around a short sale.
In Metro St. Louis, as is the case in the middle and upper income areas of most US cities, considerable home equity for properties has been created in the past several years. This is due to a strong market demand bolstered by historically low mortgage interest rates. This will assist a majority of homeowners in avoiding a “fire sale”.
For those who have to sell below their loan amount, a short sale is vastly better for a seller than a foreclosure is.
What Is a Short Sale?
For a sale to be considered a short sale, these two things must be true:
- The homeowner must have a demonstrable hardship or be about to have a hardship. This could include being so far behind on payments that they can’t catch up. It could also mean an impending hardship like a divorce where household income will be substantially reduced.
- The housing market either has gone down so much that the house is worth less than the remaining balance on the mortgage, or the “as is “condition of the house is so bad that its market value is at a price below the mortgage debt owed.
In most cases, the homeowners and their negotiator, with the agreement of their lender, will start the short sale process in order to avoid foreclosure.
Overall, there are a lot of misunderstandings around short sales. One common misconception is that lenders just want to be quickly rid of the property and will move quickly to get as much money back as possible.
That’s not true. You will have to negotiate with the lender and the better you negotiate, the more successful and shorter the process.
In reality, the lender wants to recover as much of the mortgage amount as they possibly can. It is up to them to determine if the buyer’s offer is acceptable. Therefore, negotiating with the lender is a critical piece in the process.
Short Sale vs. Foreclosure
Neither a short sale nor a foreclosure is a quick and easy way out for sellers who want to be rid of their home mortgage.
Short Sale
In a short sale accompanied by the help of a negotiator, the homeowner initiates the listing of their house, through an experienced Realtor. For a short sale to take place, the home must be worth less than the amount the homeowners owe. The listing must disclose that a short sale is in process. A yard sign does not have to state that it is a short sale.
Potential buyers will deal with the home sellers during the short sale process, but all of the details around the process must be reviewed and approved by the lender. The short sale cannot happen unless the lender approves it. At the lender’s expense, an appraisal will be done. The negotiator will advise the home sellers and work with the lender.
Because everything is dependent on the lender, the short sale process can be lengthy and unpredictable—even if the homeowner and the potential buyer agree on terms.
Foreclosure
On the other hand, after proper legal notices, a foreclosure occurs when a homeowner has failed to pay the late monthly mortgage payments within the time allotted by the lender. At this point, the property is auctioned by the local Sheriff.
This process is initiated by the lender. The lender’s legal representative plays a key role in the foreclosure process, filing the appropriate legal paperwork.
The bottom line is this: the lender will force the sale of the home in order to try to recover as close to the original loan amount as possible.
Either the lender or a buyer at the auction will take ownership of the home.
Most foreclosed homes have already been abandoned, but if the homeowners are still living in the house, the lender may have to eventually evict them after the completion of the foreclosure process. The lender will then attempt to sell the property either through an auction or through a real estate agent.
The foreclosure process typically takes about the same amount of time, in Missouri, as a short sale. In Illinois, a foreclosure can take much longer than a short sale.
Which is better? Foreclosure or Short Sale?
For homeowners, a short sale is typically preferable to a foreclosure for three reasons.
- First, a short sale is voluntary and brings an orderly closure to the relationship with the lender (while a foreclosure is forced).
- Secondly, after a foreclosure, most people are required to wait longer before obtaining another mortgage loan (while a short sale may cause you to wait for at least two years).
- Finally, in most short sales the homeowner [borrower] is forgiven any remaining unrecovered loan balance, whereas in a foreclosure there typically is a risk, for up to ten years, for a lawsuit by the lender for recovery.
Most lenders would prefer a short sale to a foreclosure process because it allows them to recoup as much of the original loan as possible without a costly legal process. In fact, in most cases a homeowner and lender will only pursue a foreclosure after an attempt to sell the home through a short sale process, or where the property has been abandoned by a non-communicative homeowner.
Coming out of a forbearance, if the borrower meets the criteria for a short sale, choosing to do a short sale is a better choice than simply letting the property go to foreclosure.