The question of whether a home owner should stop making mortgage payments during a short sale is a popular topic for sure!
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 150 -180 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. A short sale is a great way to stop a Massachusetts foreclosure!
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.
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About the author: The above Real Estate information on stop paying your mortgage during a short sale was provided by Bill Gassett, a Nationally recognized leader in his field. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-435-5356. Bill has helped people move in and out of many Metrowest towns for the last 24+ Years.
Thinking of selling your home? I have a passion for Real Estate and love to share my marketing expertise!
I service the following towns in Metrowest MA: Ashland, Bellingham, Blackstone, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northboro, Northbridge, Shrewsbury, Southboro, Sutton, Wayland, Westboro, Whitinsville, Worcester, Upton and Uxbridge MA.
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Robert best of luck with your short sale. I am sorry to hear about your financial situation. It is good to hear you are using a Realtor that knows there way around short sales! There anre many sellers that do not realize you can’t just hire any Real Estate agent and expect success.
US Bank told a seller client I just listed that a short sale would not be considered unless they were at least 30 days late. I am under the impression this is true as well, otherwise why would a bank entertain a short sale if they are getting paid?
I’m guessing you are differentiating between 30/60 days late versus being in default/having rec’d NOD usually which usually happens being 90/120 days late/no payments?
Please clarify.
Bart most of the major lending institutions require you to be in default with your mortgage payments before they will consider a short sale. There are however, some smaller lenders that do not have this requirement. It is important to find out this information up front because there is no turning back as far as a seller’s credit goes once they start missing mortgage payments. The last thing you want to do as a Realtor is give out legal advice on whether someone should pay their mortgage or not.
Hi Bill,
Are there any exceptions or limitations on who can participate in a person’s short sale arrangement. Can family members? Could a Mom or Dad buy their child’s home in a short sale arrangement with the bank waiving any deficiency judgement? Nice article on short sales.
Thanks for the compliments on my short sale article Perry. Unfortunately the answer most of the time is no you can not. The banks want to see an “arms length” transaction so they know that there is no fraud involved. Is it possible you could get a waiver from the lender…yes it is. You would have to let them know if they would allow you to do it upfront.
My husband lost his job and do the prospects of getting a new job where we live being very low we decided to short sale our home. I can tell you that FHA will not allow a short sale to go through with out you being in default.
Great article! Glad I found it. I am currently approved for a shorts sale, and I have a buyer. We were originally required to close by March 10, but that’s been pushed back to the 23rd. So now I am several months behind on my mortgage payments, but I can’t afford to pay back the payments. Will the bank foreclose on the house before the 23rd?
Hi Eleanor thanks for your compliments on my short sale article. If your short sale has been approved by the lender you should not have to worry about foreclosure. Was a foreclosure notice sent to you? If so, you want to make sure the right hand knows what the left is doing. Often times departments within the lender do not speak with one another or the bank wants to protect themselves and will keep a foreclosure date active. If you have an attorney working for you they should be making sure the foreclosure date is postponed if it is before the 23rd.
My friend’s husband passed away and she lost half of their income. Her house is on short sale and not able to make payments for 90 days. Could I buy the house that is on short sale. I lived in that house in the past. Thanks
Anonymous you could buy the short sale as long as you intend to occupy the property and are not thinking of involving the current owners in some way. The lender does not want the current owner of the property to profit in any way.
Information here is great. Question though about recourse and non-recourse states and loans. If a house goes to short sale, and the borrower moves to another state than the one that the property is in. Do the recourse laws for the new state they live in apply to the property or the laws for the for the state that the property exists in? I got to believe it is the latter meaning the laws apply to where the property is located.
Thanks!!
Thanks Mark. The law would apply to the state the property is located in.
Bill,
I am currently in the process of a Michigan short sale with two lein holders. My house is valued at 29% of what I paid in 2003. I am currently going through a divorce and was “stuck” with the house. I started the SS process in early April. I am using someone experienced in short sale who knew all the paperwork I needed to submit. I was lucky to have an offer immediatly so she submitted everything together. I was just notified by CitiMortgage that they have everything and are in the final stages of review. I managed to be current on my payments until this Month. Today I am officially 30 days late. I finally scraped enough money to pay it before the 30 days late, but found out my payment was due on the 1st and not the 6th like I thought. (didn’t know about grace period for payment). anyways, I am wondering the difference between late payments vs. short sale vs. foreclosure on my credit report. Can they nail you for a short sale and then nail you for the late payments that happened during the process? If I end up being more then 90 days late, is it “pre-foreclosure” and if so, what does that mean to my credit? Is pre-foreclosure on my report for 7 years and makes it difficult to buy a new home in 4 years? If I am 90/120 days late by the time the 2nd lein holder approves or denies the sale, what is the purpore or benifit for me to short sale if it is considered “pre-foreclosure”? In other words, when you go through a short sale and you default over a certain amount of time…what is the difference then between the short sale hit and the foeclosure hit? I am extremely confused. Thanks in advanced for your help.
Christine “pre-foreclosure” is just another name for a short sale. Your credit takes a hit for the mere fact of going through a short sale as it reported to credit agencies as a debt uncollected. Your credit is further impacted each time you miss a payment. You can read this article that discusses all the credit impacts here: http://massrealestatenews.com/buying-a-home-after-short-sale-or-foreclosure/
Setup to a Question: When a homeowner cleans out his or her retirement,kids college fund and anything else they can get their hands on to pay their mortgage and STILL has to Sell Short…and the Bank won’t agree to the Short Sale “because the borrower is NOT behind on their payments” How is that Right? Their income decreased intensely during late 2007 & 2008 (quick! who’s didn’t?) and they used everything they could get their hands on to pay the mortgage to keep from going behind on their payments in order to preserve their credit. Now their retirement/savings is GONE! The homeowner is in their early 50′s and when they are a young senior citizen 12-15 years from now and Social Security & Medicare is a thing of the past – how will things look then? Millions of people in their early 50′s (including me) are in this position and doing exactly what I am speaking of here. Think about all of us with no retirement, social security or medicare 15 years from now…these ramifications are being put into motion by the banks (all of them and you can find the list of the top 15 offenders on the FHA’s latest list for a start but their is plenty more) forcing homeowners to go behind in their payments and ruin their credit and what is left of their dignity will result in alot more then these bank ever thought of! (Big Surprise) And how about ALL of those kids in this next generation that are not going to college…does our country have a chance of being smarter rulers? Not bloody likely. Let Your Voice Be HEARD People…I’m taking this as far as I can and hope you’ll chime in and tell me your story. Don’t be afraid – tell it – your actual future and that of your children DEPEND ON IT! I’ll be sending around a petition next week. My name is Ellen Carter, I am a Realtor & Senior Short Sale Negotiator…and yes folk…This is just the beginning from Ellen’s House.
Interested in the value of your home?
click onto my website landing page and fill in the branch!
Best,
Ellen Carter
Realtor and Senior Short Sale Negotiator
Forensic Auditor & Expert Witness Consultant
Santa Cruz, CA and Hawaii
ellen@adrhomes.com
Ellen you are right that the rules in place regarding short sales do not always make a lot of sense. To force a borrower to miss payments is certainly one of them. You have some very valid points of what all this does to our economy and Real Estate markets around the country.
Julio I would not take any chances with this and make your mortgage payment as soon as possible.
This is an awesome blog — thank you. I am a Realtor from New Mexico and looking for information for clients. You are thorough and show a great deal of integrity in your information.
Pamela thank you very much for the compliments on the my Massachusetts Real Estate Blog. I try to give my best especially when it comes to short sales as they are a real passion of mine.
Question and Help!
I am anew homeowner; this is my first house. 40 year loan which will balloon in 4 more years. I have to work a second job to make ends meet and a raise from my Masters got hijacked by this crazy governor.
I want to keep my home if I can. I m attached to it. I have a lawyer and a realtor. I told them lets do a short sale to get the financial burden off my back, but am seriously wondering if BOA will work on modifying/refinancing with me. I hear they might. What should I tell the gentlemen who are helping me? Am I nuts to be this hopeful?
Please guide,
Rebecca
Rebecca it is possible you may be able to get a modification but not probably. Tons of people apply and do not get the modification. Many of my clients have tried to get loan mods and can’t. They are left with no choice but to short sale their property.
I have a rental in Arizona the rent pays for the mortgage and other costs like insurance and property tax. I bought the house for 260k had 60k down payment and the property worth 120k now. However, at the end of the lease I have to spend lots on money to fix it that takes a month to do w/o getting rent money. I have to also pay for my travel and hotel and other expenses. Can I do a short sale on this property and what I need to do. I have a very good credit score and never missed a payment to WFB. Please advise what to do?
Hoosh it would be impossible for me to know given what you have told me if you qualify for a short sale or if the lender would approve the same. Most of the time, but not always there needs to be some kind of hardship on your part.
Bill great write up!
I have an easy but a hard question. I really don’t want to do a short sale but feel that it is the only option my family and i are going to run in to. We bought a house back at the peak of the market for 85k. Had the house inspected and checked out ok. Said roof is great has 20yrs left or so. Good electrical. great water pressure. Yada yada. You understand the rest. After 4 years into the house I notice water coming into our bathroom. End up going up to the attic. Come to find out that when the roof was put on they put the wrong size sleeve around one of those pvc pipes that come out of the roof. Has a small amount of light coming in around the pipe and sleeve. This was our first home. The problem is that by the time I noticed the problem it has had about 5-7yrs of contamination and water damage. We have now been in the house for about 6 years and paying bi weekly payments. I have been working on trying to seal off the leak to stop it from coming in however it was so bad by the time I noticed that joists are rooting and wood from roof below shingles is gone and rooting in about a 3 ft square spot. Which means roof repair. And the ceiling in 2 rooms need to get redone do to water damage from standing water on top of the drywall. I cant go back on inspector or anyone because it has been to long. But the amount of money to pour into the house to fix it would be way more than the value of the house. I still owe 72k on it. And with the market the way it is If i did the improvements to the house that is needed to make it better and sell it would only gain me a couple grand in the selling price if not any. We want to move because I now have a 1 year old daughter and this house is not the best place for her. That doesn’t even count all the windows that are only 8 years old and are all bad do to the house settling. The house was moved to the spot it is at currently. They put new windows in right after it was moved. Any ideas?
Thanks in advance
Chris
Hi Chris sorry to hear about your issue. I am not really sure what you are asking me in regards to a short sale?
I have a question for you my husband passed away last May I have keep our mortgage payment current, but money is running low. My husbands name was the only one on the home loan, I am thinking of doing a short sale can I? At this rate I won’t be able to make the payment much longer.
Hi Brenda – I assume that you are now the legal owner of the property since your husbands passing. Assuming this is true I don’t see why you wouldn’t be able to do a short sale but I would consult with an attorney.
I have a question regarding early possession during a short sale. My situation is this: the owners are gone and their property is being sold as a short sale. We have been through the process of all the paperwork and approvals and now are just waiting for USDA to approve. We asked for early possession until it closes. Our realtor drafted a contract and submitted our request asking to move in prior to closing which has been given an estimated date of Feb 27. The seller countered our offer and requested $30 a day. Granted this house is being sold ‘as is”. At first we were annoyed at this request considering we had to have the utilities put in our name prior to the inspection process and now instead of having the house re-winterized we have left the utilities in our name. After the inspection there were multiple repairs noted. Some were general safety issues and another a code violation. None of these issues we asked to have repaired due to knowing the sellers position with it being a short sale for sale as is. I wasn’t aware a seller could request rent during a short sale. What do you recommend?
Chris – the seller can do whatever they wish as they still own the home. The lender however, would more than likely have a problem with the seller collecting rent. Of course the lender is not going to know this and it would not be in your best interest to create waves.
I am the executrix of my sister’s estate. I have informed the mortgage company that the estate is unable to continue the purchase of the house by paying the mortgage. I intend to send them one final payment as the estate have no more funds. What is my next step in this situation?
Dorothy assuming that the estate wants to short sale the property you are going to want to work with a qualified short sale Realtor. If you need help with this email me and I can put you in touch with a good agent in your area.
Hi Bill, Thanks for the article, it is very informative! My family is going to attempt a short sale, but we were planning on living in it while we’re doing that, for up to 3 months, then if it does not sell we are planning on just foreclosing on it. But we are planning on paying for it the entire time it is up for short sale as long as that is a route we can take. My question is how long does it take for the lender to report it to the credit agency? My concern is it will affect us renting another home if we do not move out immediately after starting short sale process. Thanks for any advice you have!
Amanda you will be fine as long as you continue to make payments. The credit reporting will not change until after the short sale is completed and if you make payments your credit score will not be effected that much.
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