Thursday, January 19, 2012

Seller Contributions to a Short Sale

A short sale occurs when the seller of a house owes more to his mortgage company or companies--the mortgagees--than the house is worth. The seller needs his mortgagees' permission to sell the house, because the mortgagees will not recover all the money owed to them. A short sale does a lot of damage to a seller's credit rating, and it will impact his ability to buy another house. It may also hurt his employment opportunities if a prospective employer uses a credit report as a way of sifting through too many applicants.

I have learned a lot about short sales in the past few years, and some of it is counter intuitive. For example, most homeowners stop making their mortgage payments around the time they put the house on the market as a short sale. Other homeowners stop making their payments and don't try to sell the house until they get the notice from their mortgagee of the looming foreclosure. By withholding their mortgage payments, these sellers can save a lot of money. They can move into a rental before their credit rating is wrecked, and they can get on with the next phase of their life.

The third type of short sale seller, the kind who keeps his mortgage up to date in order to minimize damage to his credit rating, is rare. Many of these sellers are depleting their savings and borrowing on credit cards and from relatives because they have never defaulted on an obligation, and even though their house has lost value, they want to fulfill their obligation to their mortgagee to the best of their ability.

Which seller do you think will have an easier time negotiating a short sale with his mortgagee? The seller who makes his mortgage payments, or the one who doesn't?

In my experience, negotiations will go much faster for the homeowner who is delinquent on his mortgage. While his mortgagee may ask the homeowner to bring cash to the settlement table, or sign a promissory note to repay some of the deficiency after close of escrow, if the homeowner refuses to pay any more, the mortgagee usually backs down.

The homeowner who has borrowed and sacrificed to keep his mortgage current may not enjoy the same forgiveness. If the mortgagee decides that the homeowner can pay, a cash contribution or promissory note will be required. If the homeowner who is current on his mortgage says he can't or won't pay any more on his mortgage beyond what is netted from the short sale, that homeowner may face foreclosure, which will net his mortgagee far less than a short sale will.

Here are some of the reasons a mortgagee may insist that the seller bring a cash contribution to close of escrow or sign a promissory note for future repayment of the deficiency.

1) The seller has a better than average salary, regardless of how many bills that salary has to pay.

2) The seller has a high credit score based on his desperate efforts to keep all his bills current. His credit card debt may be steadily rising because he is borrowing to pay his bills, but this is not taken into account by the mortgagee.

3) The seller may have significant resources in his retirement account. Even if he can't access those resources, the mortgagee may say the seller could pay his mortgage debt by liquidating his retirement account.

4) Investors--people who bought the property as a rental--are usually assumed to be able to afford a promissory note or cash contibution somehow.

I will never tell a short sale seller to stop making his mortgage payments. For some, it's impractical, and for others, it's unthinkable. The damage to his credit will be less severe if he doesn't have late payments compounded by the short sale. However, there does seem to be a trend that keeping mortgage payments current can be detrimental to the short sale seller in negotiations with his mortgagee.

If you would like more information on the pros and cons of short sales, and resources to help you make your decisions about a short sale, please let me know.

1 comment:

Sell Real Estate Note said...

Hello Everyone,
Very informative blog. It's one thing if the seller refinanced to pay off a high interest rate or completed a home-improvement project. If the seller's setback is temporary, the bank might ask the seller to contribute. Thanks a lot for sharing this...