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What is a short sale? 

 A short sale occurs when a lender is willing to accept less than what is owed to them to pay off your existing mortgage.  The lender does this by submitting a "payoff letter" that is less than the outstanding mortgage and allows the borrowers debt to be forgiven.

What happens to the remaining debt?  If I owe $200,000 and the bank accepts $170,000 what happens to the difference? 

The answer is it depends!  There are several options the lender may consider.  One of the most obvious is to ask that the court issue a deficiency judgement favoring the lender and enabling the collection of any "deficiency" or amount not covered by the sale of your home.    A savvy Realtor should negotiate that the lender waives their right to file a deficiency judgement.  This is critical to the financial health of the homeowner . 

There are several other options available, please contact me for details.

What happens to my credit score if I choose foreclosure over short sale?

Current guidelines drop your FICO score by 100 points in a short sale and up to 250 points in foreclosure.  The recovery period is also of issue.  In a short sale, homeowners are able to reapply for mortgages in as little as 18 months.  Foreclosure may cause borrowers to wait up to 36 months before they can buy another home. 

What is foreclosure? 

Foreclosure occurs when a homeowner stops paying their mortgage and the bank "reposesses" their home.  Iowa is a judicial lien theory state.  What does this mean to a homeowner considering foreclosure?  It means in Iowa you have more time than some states to try to cure your debt before the bank forces you out of your home. 

How do I know if my home qualifies for a short sale? 

Typically, a property might benefit from short sale if the liens (first mortgage, second mortgage, tax liens, upaid judgements etc.) exceed market value. 

What do I do if I can't pay my mortgage?

1.)  Contact your lender! 

It's very important not to hide from your mortgage company. Many homeowners are facing uncertain futures.  ARMS have increased and many find themselves unable to afford their mortgages.  In most cases your mortgage company will work with you to solve your financial distress.  Maybe short term, maybe long term, but in either case, it all starts with communication to your  lender. 

2.) Negotiate a forebarance. 

Lenders and homeowners have one thing in common.  You both want to avoid foreclosure.  Your lender may work with you to defer payments and give you a window of time to catch your breath.

3.) Refinance.

You may be able to consolidate your mortgage and perhaps higher interest debt by refinancing your home.  This requires good credit history and some equity.  This may compound the problem, be smart about not spending your equity if you are able to refinance!

4.) Sell your home.

If you have equity downsizing into a more affordable home can be fiscally responsible.   If a more affordable mortgage allows you financial freedom, preservation of your good credit and the ability to sleep at night what are you waiting for?  Downsize and preserve your financial freedom by preserving your good credit!

5.) Sale and lease back.

This is when you would sell your home and rent back from the new owner.  Please be careful when considering this option.  Do your research and have a legal lease that is fair and equitable and builds in protection for both parties. 

6.) Give a deed in lieu of foreclosure.

In this declining market, this is not a popular option with lenders, but in theory you would "leave peacefully" saving the lender the cost and time and possible damage to the home during the foreclosure period.  You would lose your equity in the house but preserve your good credit.  The lender takes over the home without having to foreclose. 

7.) Foreclosure.

By far the most severe option.  Ruining your credit worthiness and losing the equity in your home.  There is a chance a deficiency judgement will be placed on you for the difference between what you owed and what the lender was able to sell your home for.  That judgement could possibly be turned over to a collection agency.  Your Fico score will lower by at least 250 points and your ability to purchase another home will be delayed for at least 36 months, if not longer due to any deficiency judgement.