At the beginning of the real estate crisis that swept across the United States at the start of 2007, homeowners across the country could do nothing as they watched the value of their homes plummet and mortgage payments, for those with mortgages with an adjustable rate, went up. Vast and widespread unemployment, decreased level of average income, and an increase in expenses put many homeowners in a desperate situation. Thousands of people lost the only way of life they knew and many families came to the brink of ruin. A huge number of people, looking for an escape, turned to drugs or alcohol in search of a solution, but this only made matters worse and put a strain on the health services as people looked for an affordable way out of their dependencies. Under the financial strain, many looked to foreclosures and short sales as a way to get back on their feet, however, many lenders would only consider agreeing terms for a short sale if the homeowner was behind on their payments. Today the situation has changed and the criteria for short sale approval are more favorable for those who have hit hard times but have kept up their repayments.
The Hardship Package
To qualify for a short sale, a so called ‘hardship package’ has to be submitted directly to your lender. The package consists of a letter which details why you have to sell your home for considerably less than the amount of the mortgage. The reasons could include:
- A change in household income
- A change in circumstances which is likely to affect income
- An employment transfer
- A change in profession
- Struggles related to the depressed market
You should highlight that while struggling to make mortgage repayments at this difficult time you are doing so out of an ethical sense of responsibility and obligation to honor your finances. This might well present the lender with something of a contradiction, as you are also going to naturally prove that you are able to keep up your mortgage repayments, it shows that you have a good attitude towards your debt and understand money obligations which might well be enough to open the door for discussion with the lender. Before writing and submitting the letter, you should consult your real estate agent and/or and attorney to tighten it up and make it more professional and convincing. They will also be able to advise you to add or admit any necessary or unnecessary details.
Your credit score will unavoidably be affected by a short sale, but this may only be for a short time and for a low amount. Missed mortgage payments, on the other hand, are very bad for your credit score and should be avoided where possible. Creditors are much less likely to want your business if you have missed a mortgage payment than if your property has been through a short sale. Your possibility of negotiating a mortgage in the future will also be damaged. Paying your mortgage puts you in a strong position to get a government backed mortgage and this will usually be immediately available after the short sale has concluded.
Avoiding the dreaded foreclosure
If you miss mortgage payments, your lender will issue a letter of notice to you informing you that legal action will inevitably take place. In cases like this, the house is often put up for a short sale but is foreclosed upon before the short sale has reached a conclusion. Ensuring you make your mortgage payments prevents any legal action leading to foreclosure.
The Home Affordable Refinance Program
If your home is worth less than the amount you have left to pay on your mortgage, but in spite of this you continue to make your repayments, you may well qualify to have your mortgage reconsidered and your payments reduced. The original loan must be a Fannie May or Freddie Mac and the loan to value ration has to be over 80%. Before approval, however, your repayments will come under close scrutiny. If you have kept up payments you should be OK as the program was set up with the intention of showing good faith to those who have managed to deal with their financial obligations.
Note: This post is contributed by Em Noe