Mortgage Payments and Short Sales

When we talk to homeowners who are considering short sales because of some form of personal financial distress, they are understandably concerned most with the financial mechanics of the sale.

A common question is what they should do regarding mortgage payments. Should they continue making them during the sale, or should they stop? That’s what they want to know, and depending on just how bad things are financially for them, they would prefer to stop making payments. Especially if they want to try to scrape together enough money to find a place to rent after the short sale wraps up and they need to move.

The general rule is that lenders and mortgage services would like the homeowner to continue making payments. But at the same time, most of them require that the homeowner be behind on payments, and in default, in order to be considered eligible for a short sale.

Also, they prefer that the default be attributable to an adverse, unavoidable financial hardship such as loss of a job, divorce, overwhelming medical bills, or some kind of forced relocation (such as a job transfer).

A short sale by a homeowner who is not behind on payments is unusual, but not unprecedented. We have on occasion submitted a short sale for a current borrower, in effect testing the waters as far as the lender is concerned. If default is required as a condition of the short sale, though, the lender typically tells us that right away.

But homeowners have to be very careful when it comes to stopping their mortgage payments. If they do so and don’t move ahead quickly with a short sale blessed by their lender, they can easily lose the house to foreclosure. Once a homeowner gets behind, especially if he or she is already in financial distress, catching up on payments will be extremely difficult in the event the lender won’t go along with the short sale.

With that said, though, once a short sale gets under way many lenders are willing to allow the homeowner to ceas mortgage payments for the duration of the sales process. But these arrangements have to be negotiated with the lender once the short sale gets the go-ahead.

This is one more benefit for a homeowner when it comes to a short sale. The extra time they can stay in the house, without making payments, gives them a little more financial breathing room once the sale concludes. Add that to the reduced “stain” on the homeowner’s credit history that a short sale offers relative to a foreclosure, plus the ability to walk away from the sale free of the mortgage obligation, and it is no surprise why more and more homeowners are opting for short sales in this market.

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