How to Get Our of Your Home Without a Short Sale

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This guide is intended to give you information about the process, but remember to involve an attorney before making decisions, or call your Realtor to get put in the right direction.

Before we discuss the how, it is important to know what a short sale is, and how it differs from a traditional sale.

Short sales were an unknown term before the 2007/2008 financial bust, unless you were in this business during the last bust in the housing market. Overnight, these types of sales became prominent, because the Great Recession was one that hurt property values like nothing else seen in many years.

What is a short sale?

In the most simple terms, a short sale is the sale of a property because its market value is less than the amount owed to the bank on the existing mortgage. As an example, if you bought your home in 2005 for $500,000, and took a $400,000 mortgage on that property, when you want to sell in 2010, your mortgage amount might still be close to $400,000. However, the actual value of the home on the market is $350,000. This puts you 'underwater'.

Now, using the same example, when you sell, you have two options, sell the home and pay the difference between the sale price and mortgage, to the bank, OR have the bank accept the difference and take a loss - a short sale.

As a seller, you make the decision to sell or not, and to accept a purchase price, that is then reviewed by your bank. You take the risk that the bank might ask for you to bring money to the closing table, but part of this process is showing the bank your financial hardship, making the likelihood of that much less.

How do I know if my home would be a short sale?

This is something that your Realtor can help you determine, through conversations with the bank, and by determining current market value of the home. Even if you think you are okay, if you have any sense that you might owe more than the home is worth, make sure to bring that up to your listing agent.

What are the negative aspects of a short sale?

If you are successful in your short sale, the resulting hit on your credit is something that will effect you for many years to come. In other words, unless you have cash, or another borrower to help you get financing for a new home, you would be stuck without a home to move in to.

The term 'short sale' is misleading, because the time it takes to actually complete the process is 1-12 months longer than a traditional sale. This time must be taken into consideration when determining your best course of action.

How do I get out of my home without having a short sale?

This is the golden question, and I can use examples of what I have done with clients to answer it.

In order to really paint the picture of what you might need to do in order to get out of a short sale without taking a credit hit, I will give a bit of information about the financing process. In other words, when you need to qualify for another loan, a bank will look at your debt to income ratio. This ratio is effected by all the recurring debt you have, including your other existing mortgages. This is where most homeowners get stopped in their tracks. Because you have an underwater asset, and you likely cannot afford to hold two mortgages, or both you and your partner are both on the underwater mortgage as cosigners, you are stuck - You cannot qualify for a home now with additional debt AND/OR Once you go through the short sale process, your credit is destroyed so you still cannot qualify.

Here is what we did:

It was 2012, and a client contacted me to sell their condominium, which they bought at the literal peak of the housing market. As always, I went and saw their unit, and gave them a pricing proposal. Through our discussions, I realized that they could not get out of this home, because they were both on the mortgage, and it was $100,000 below the borrowed amount. I informed them of their options:

1. Sell the home and pay off the bank;
2. Sell the home as a short sale - then they can rent for a few years and improve their credit;
3. Rent out their home for a year, rent a place to stay (or stay with family), and then purchase a home.

Option 1 required more than $100,000 which they didn't have, so that was out. Option 2 would be an unknown path, with a long time-frame. Option 3 was perfect for their situation, and here is why:

When a bank is looking at your financial situation, they want to see as little debt as possible. Since this condo was showing as huge debt, impairing their ability to purchase, they needed to get rid of it as debt, and transfer it into the income side of the table. When you rent out your home, you are generating income, which goes to pay your home expenses, thus offsetting the debt service of the mortgage, taxes, insurance, and common charges (at something like 75% of the rent price). So we ended up putting the home on the market for rent, and getting it rented. My clients moved into their parents home, and started showing income from the property. Once 6-12 months were under their belt, which they proved around tax time through their W-2s, the bank could then recognize their underwater property as an asset instead of a liability. They went on to happily purchase a home, where they now live, and continue to rent their condominium, that they can sell down the line once they build up a bit more equity.

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This is not the first time I have given this advice to homeowners with their home, either in a short sale position, or for a home that they wanted to sell at a higher price. Renting while the home builds equity and appreciates in value (possibly) is something that gives a homeowner time to weight the options.

As always, if you would like more information about short sales or this process, just reach out to me, and I am happy to lend my expertise. I have done it before, and saved clients from taking a huge credit hit, and helped them move on to the next stages of their lives. I can do the same for you!