There are a lot of myths floating around when it comes to successfully doing a Real Estate short sale. One of the more prominent untruths is the fact that you need to be in default with your lender in order to do a short sale.
On numerous occasions both online and around the water cooler in the office, I have heard other Realtors telling their clients that they need to be behind in their mortgage payments in order to complete a short sale. This is flat out WRONG and could have negative consequences for the seller if they listen to that advice.
One of the most difficult questions a client or customer can ask me is whether or not they should stop making mortgage payments. While I am well versed in short sales, a lawyer I am not and therefore should not be handing out legal advice. When I am asked this question more often than not I will have them speak with the lawyer I work with on all of my short sales.
If you are thinking you may need to do a short sale here are some things to consider regarding whether or not it makes sense for you to make mortgage payments or not:
Reasons to Stop Making Your Mortgage Payments During a Short Sale
Although you do not need to be in default in order to do a short sale most lenders will act quicker on a file that is delinquent. It makes perfect sense. Why would a bank give priority to someone who is current on their loan?
Some sellers just don’t have a choice, as financial hardship has forced them to put all their money towards essentials such a food and heat.
The money being put toward the mortgage could be going towards building savings to be able to pay future rent and other living expenses instead.
Lenders may be less inclined to go after a seller if they are not making mortgage payments. It is obviously difficult to get blood out of a stone and some banks may not want to expend the energy chasing down a deficiency.
Biggest Drawbacks of Going Into Default
There will be an impact to your credit score. Whether you go through a short sale or let the home go to foreclosure there will be an impact on your credit. Every circumstance is different but speaking in generalities your credit score could take a whack of around 200-300 points in a foreclosure.
A short sale has the potential to be around the same, although I have seen in quite a few circumstances where the drop was closer to 100 points.
You will not be able to buy another home for two years. For a Fannie Mae backed loan you will more than likely not be able to get a loan for two years.
End up in foreclosure. If you are not making payments during the short sale process and the bank rejects the sale you could end up losing the home to foreclosure. This obviously would be the case anyways if you did not have the ability to pay the mortgage.
The case for making mortgage payments during a short sale
If you can financially afford to make your mortgage payments in a short sale, you may want to for the following reasons:
You more than likely will be able to get an FHA loan if you were not late on any of your mortgage payments. According to Fannie Mae guidelines issued in August of 2008, you are also supposed to be able to get a conventional loan if you do not have to pay back the lender the “short fall” and did not become delinquent during the short sale. While this is supposed to be the case most lenders say otherwise.
Making your payments does help protect your credit to some extent although the lender can still report your short sale which will effect your FICO score. This is recognized as Credit Score Factor Code #22.
If the home does not sell or the bank rejects the short sale you will still be current and not in jeopardy of losing the home.
If you have not fallen behind in your mortgage payments it may make the whole process easier to cope with emotionally. There are many that get worked up from the fact that they are failing to payback an obligation they signed up for.
For a complete understanding of the process from both a buyers and sellers perspective see Massachusetts Short Sales.
Are you needing to short sale a home or condo in Ashland, Bellingham, Framingham, Franklin, Grafton, Holliston, Hopedale, Hopkinton, Medway, Mendon, Milford, Southboro, Westboro, Natick, Northboro, Northbridge, Whitinsville, Upton, Uxbridge, Shrewsbury, or Douglas? Get in touch I would love to interview for the chance to represent your best interests.
I am successfully completing short sales through out the Metrowest area. So far, knock on wood, I have a 100% success rate for short sale approval. If you are not in the Metrowest area and need to do a short sale please feel free to contact me and I would be happy to refer you to a Realtor in your location that handles short sales.
News, views, opinions and happenings for Real Estate throughout Metrowest Massachusetts and beyond including Ashland, Hopkinton, Holliston, Southboro, Westboro, Milford, Medway, Franklin, Grafton, Upton, Mendon, Hopedale, Northboro, Framingham, Northbridge, Shrewsbury, Whitinsville, Uxbridge, Bellingham and Douglas. 
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Hi Bill….great looking blog!
You specify in your article that with “most” lenders the homeowner does not have to be delinquent but, unfortunately with all the homeowners that I have represented, the banks have basically said that they have to be delinquent in order for them to consider the short sale.
One in particular, after months of calls and additional documentation, finally said; “this is a performing asset, why would we look at a short sale? the file is closed”
You are absolutely right is the statement that it is not up to us to tell our clients to stop making payments. I always advice my clients to talk to the attorney and lender before making their decision.
Great article!
Thanks Maria! My experience has also been that lenders will absolutely be much more inclined to deal with someone when they are already in default. My point was that is not a necessity for some of the lenders. If a Realtor tells a client to stop making mortgage payments and that was not necessary, they may open themselves up to liability.
Another great article, Bill!
I would like to add that I DO indeed have a blanket statement…for Buyers and Sellers alike: “Anything can happen. Expect the worst but hope for the best!”
I look forward to reading your future postings!
Judy
You should always continue making your mortgage payment while you are in the process of a short sale. If the seller knows that you are 3 or 4 months behind in your payments, he might decide to wait for the foreclosure. This way he can get a better deal.
Being in default on the mortgage could also affect the price that is set in a short sale. For example, if the lender is thinking of a price of $300,000 and you are behind $15,000, he might have to adjust the minimum price to $315,000. This new price point could very well exclude some qualified purchasers.
Laura you are absolutely incorrect on both of your assumptions. 1st of all the majority of all lenders will not even discuss a short sale unless a seller is behind in their mortgage payments. I think you meant the buyer and not the seller but generally speaking most lenders are not going to foreclose if you are doing a short sale and a legitimate offer has been submitted to the lender. Lastly, your last statement about being $15,000 behind would cause the lender to seek $15,000 more is rarely the case either. The lender is trying to get as close to fair market value as possible while also avoiding an expensive foreclosure. That is the whole point a lender will consider one in the 1st place. I am not sure where you are getting your short sale information from but it is very inaccurate!
As someone who just sold (and closed) on a short sale as a seller, I will tell you that my mortgage company (Citimortgage) really did not get moving on my short sale and assigning an analyst to work on it till I was about 3 months behind in my payments. Even at that point, the analyst assigned only collected information/documentation until the point in time that I had an offer. Ultimately for me, the foreclosure had been scheduled for June 2010, and our offer came in early May after I agressively started lowering the price.
Ultimately, the mortgage company put a ‘hold’ on the foreclosure; approved the deal about 2 weeks after all the paperwork was received and we closed this week.
In my case, it was simply a case of making the decision not to send good money after bad by keeping my mortgage up to date. I paid $290K three years ago for a lakefront home; put about $60-75K into it, and sold it for $250K. From what I’ve seen (E. Texas), the market still hasn’t bottomed out.
John your short sale experience sounds similar to many. While it is not a certainty, most lenders will not work on a short sale unless the seller is behind in their payments. It is good to hear that your short sale was approved and you avoided foreclosure. Best of luck to you!
Thank you for all of your postings and information on this website. Your insight is very helpful. I am in the process of selling my condo (in the Springfield, MA area) via a short sale as a result of a medical hardship. I have an offer, the potential buyers had an inspection which went fine, the mortgage company had an appraisal done 3 days ago and now I’m waiting to hear. I owe $205,000 and the offer that was submitted was for $143,000. I have just one mortgage (Fannie Mae). This mortgage is not with BoA; however, I have not paid my mortgage for 3 months and am concerned about my credit and FICO score. The sooner this gets completed, the sooner I can begin to rebuild my credit and my life. I know you’re not a mind reader; however, given your experience, what are the usual next steps in a foreclosure proceeding and is a difference of more than $60,000 usually accepted by the mortgage company? Waiting and wondering is an extremely difficult thing, as you can well imagine. Thanks.
Dee
Hi Dee – Sorry to hear about your situation. Whether or not this ends up working as a short sale or not will more than likely depend on whether the accepted sale price of $143,000 is near the fair market value. The difference of what you originally paid for the condo is less important. The fact your have not paid your mortgage and are doing a short sale will impact your credit. You will probably be looking at a ball park of 150 point drop in your credit score. Best of luck to you with your short sale!
Your information is very helpful. Thank you. I have a situation in a home I lived in in an Atlanta suburb and could not sell when I moved. I have been renting it for almost 7 yrs and always take a loss, including a 9 month period where I had no renter and had that mortgage and my own. I was just informed that the current renter cannot pay this month and is leaving. I live out of state so we went to view the home over the weekend and it is trashed. It needs a lot of work that will put us above what we could sell for. I need to stop the bleed. I have a primary mortgage and HELOC through 2 different banks. I am current but don’t want to waste money if I’m going to lose the house and not make anything back. I’ve met with a couple of agents and have discussed short sale options to avoid foreclosure. I don’t know if I should call the lenders and discuss my situation now, if I should pay the mortgage this month, or what to do. I am currently renting, so I would like to know I can purchase another home before 5-7 years (in the event of foreclosure). Any advice?
Hello frustrated landlord ~ I am sorry to hear about your situation. In a short sale you will not be able to purchase another home with conventional financing for 2 years. In a foreclosure it will be five years. The agents that you are interviewing should be able to offer advice on your short sale. Make sure you use an agent that has short sale experience…this is critical. You should make sure they are closing short sales!!
Thank your for this great website. I lost my job, then my unemployment ran out. I am now living off my savings. I stopped paying my mortgage 3 months ago and requested a short sale package from the lender which requiers financial statements. Can the shortsale be denied and/or can they hold me responsible for the shortfall (if approved) because I have some savings which I am now surviving off of until I find employment again?
Hi MsJ – Yes it is always a possibility that your short sale could not get approved. It is very important that you have good representation when doing a short sale. I would suggest that you have both a lawyer and a Realtor that are well versed regarding these kind of transactions. You could be held responsible for the short fall. Again this is where proper negotiations can go a long way in helping you get out of this situation with the least possible future headaches. This is not something you should try to do on your own.
Thank you for your great advice. I have just started to short sale my home which was purchased five years ago by my deceased husband. After his death i assumed the mortgage. Currently, my credit score is quite low due to my dept to income ratio. The house is way more expensive than I would ever qualify for on my own. I have struggled to hang on to it for my family, but I too need to stop the bleeding. Do you think that since my dept to income ratio will improve dramatically that perhaps it will not effect my FICO so negatively.
S.S you FICO score is going to take a hit regardless of your debt to income ratio. You can expect somewhere in the ball park of 150-200 point decline in your score. Good luck with your short sale!
Bill, I enjoy reading all the articles on your blog. They provide extremely helpful information for consumers and if I were buying or selling a home in MA, you would be the first and only person I would call.
Dan thanks for the compliments on my article about making mortgage payments during a short sale. Your thoughts are much appreciated!
Bill, great website! I’m a Realtor in Bend, OR and one of the most common questions I hear is about missing payments. We just tried to get a short sale approved with IndyMac while the borrower/seller was current. Indy said they would approve a short sale if the borrower is current so we gave it a shot. We submitted an offer and I called IndyMac for a status report. I was told that the investor, Fannie Mae, will not initiate or consider a short sale until the borrower is at least 30 days delinquent. This is really frustrating since most loans are backed by Fannie or Freddie. In fact, if you read the HAFA guidelines from Freddie Mac, they require the borrower to be 60 days delinquent to be eligible for a HAFA short sale. I wish there was another way.
Cheri – One of the things that lenders train all their staff to do when someone inquires about a short sale is to tell them to continue to pay their mortgage. It is a shame that they can’t just be truthful about the situation.
Hi
So we just recently listed our house and was advised by our Realtor to stay current on out payment. First if the bank rejects an offer to stop paying. We have a first and a second mortgage (the whole loan was to fiance the purchase) and is deep under water (owe 360K and might get 200K for the house). My credit is in the 800 range, Any advise
Thank you
Adam
Adam this is advice that you would want to get from a qualified attorney that understands short sales. You are going to need to find out if your lender will allow you to complete a short sale while remaining current on your mortgage. Many lenders do not and will want to see that you are delinquent.
Hi Bill
Thank you for the info. My Realtor has a legal team he pays to deals with the bank when we submit an offer. I guess I have to ask for more details.
Thanks again
Wow! Thanks for the info. I have been trying to get a loan modification after my divorce but was denied by the homeowner’s plan and BofA gave me an in house modification, but their proposal was $70 a month off my current payment and wanted to add $10,000 to the current principle balance. I opted not to do that as it really wasn’t much relief to me. I’m now looking into a short sale. My payments are current as of now. How bad will my score be effected and can I purchase a home in the future? I’ve gotten the run around from BofA through this whole modification process and am not looking forward to having to work with them again on a short sale. Just wast to explore my options. Really hard to swing the monthly payments. Is there an agent that can help me with this that you know of? Thanks!
Hi Cheri – Sorry to hear about your situation. The credit impact of a short sale can vary from person to person. More than likely you can expect to see your credit score drop from 125-200 points. You will not be able to get a conventional loan and make a home purchase for around two years. The short sale is a better alternative to foreclosure as your credit score will most likely drop by a greater amount but more importantly you would not be able to purchase another home for 5-7 years.
If you want to provide me with where you live I can provide you with a referral to someone who works with short sales.
Hi, I purchased 7 homes 5-7yrs ago, thinking it would be a great investment. Obviously I was wrong. We have been through hell finding decent renters and it is just stressing out my wife and I. I am working 2 full time jobs and my wife is working. With rent going down, fix up costs and non-payments, we have lost close to 20k this year already. Our savings are all used up and we are now trying to decide what to do. My initial thought was to simply short sale them one at a time as the renters move or stop paying, until it is managable, taking the tax hit (though I think we can prove insolvency, plus I have years of roll over tax credits) and the credit score hit. I am not late on any payments, YET…. But I now wonder if it would be best just to do them all at the same time and just get it over with, instead of dragging it out over 5-6yrs. Have you dealt with many people in my situation? any advise?
Hi Scott – I am really sorry to hear about your situation. With multiple properties your short sale dilemma is a little different than most. My initial thought would be that it would probably make sense to do them all at once so that your credit ratings are not dragged down for a longer period of time. Your situation however, would be better answered by a competent accountant/attorney who is intimately familiar with your finances.
hello, my mortgage co. making me do a short sale. my home has been listed to sell almost 30days, i am also 3 months behind. i can not get approved for a modification, special forebearance, no help at all. How long do you have to sell your home in a short sale?
Hi Michele – Sorry to hear about your financial situation. How long you have to sell your home in a short sale in completely up to your lender. You want to make sure that whoever is representing you in the short sale whether it is a Realtor or attorney makes notifies the lender.
Most of the time the lender will give you a decent amount of time to complete the short sale. Getting an offer will really help so you want to make sure the home is priced properly and does not sit on the market for an extended period of time. Best of luck to you!