Should you short sale your home?

If you're new here, you may want to subscribe to my RSS feed. Thanks for visiting!

I get a lot of emails from people who pose some variation of the question about what steps they should take now that they find themselves behind in mortgage payments and unable to bring themselves current or manage the increased monthly payments associated with an adjusting adjustable rate mortgage. A lot of them inquire about short sales as a possibility to get out of their home and want to know how the short sale process works.

Unfortunately there isn’t a lot of good information out there for people who are looking at short sales as an option for getting out of a bad mortgage situation. There are plenty of books about making money buying short sale properties; but there is little in print about the pros and cons for home owners who are considering the emotionally and financially difficult situation.

According to Jim Woodall, a short-sale expert in San Diego, CA short sales, while each unique for the family, typically fall in to three buckets or types. Before you decide to choose a short sale as the right option for you I recommend you talk to some one like Jim who can walk you through the process to see how you benefit. You can also listen to the highly informative podcast we did about short sales.

The Three Buckets of Short Sales:

Purchase Money Only - If you bought your home at the top of the market and have never refinanced your home or added a home equity line of credit or second mortgage this is your bucket. If you’ve decided to short sale due to declining market values in your area you are in the best position to short sale your home. Why? Purchase money loans are non-recourse. Non-recourse means that the bank’s only resource for the money that you borrowed is the home itself. Nothing else. This is by far the best bucket to be in.
Refinanced with One Loan - If you have refinanced your home since you purchased it and have borrowed against your home equity; but still kept just one loan, you are in bucket number two. All refinance loans are recourse loans which means that banks can seek additional recourse for the money they lose when you short sale your home. They can go after your additional assets to seek compensation for the money you borrowed and are now not planning on paying back. Luckily for people with one loan the bank is willing to take a certain loss on properties (specific to each home) and will not seek recourse for the additional money because the legal fees and time challenges make that an unattractive option. Most banks will accept the short sale as the only recourse (even if they are legally entitled to pursue additional channels).
Refinanced with Two Loans – If you refinanced and borrowed against your home equity by using a new first mortgage and a second (or junior) mortgage such as a home equity line of credit of fixed second you are in the third bucket. When you consider a short sale with two loans you are asking the second loan holder to take a 100% loss on their loan to you. Second loans are recourse loans; and these second lien holders can pursue additional recourse for the money loaned to you. This means that even if your first mortgage holder approves the short sale, the second mortgage holder may not or may come after you for the balance of your second mortgage. This third bucket is the most difficult bucket to be in to complete a short sale.

In future posts we’ll talk about the steps you need to take if you are considering a short sale on your home; but first, you must identify the bucket you are in to get a feel for your prospects in completing a shot sale to your benefit. As you can already tell bucket number 3 is not the place to be when considering a short sale as an option out of your property.

If you want to learn more now, listen to our short sale podcast with Jim Woodall; and if you’re in San Diego be sure to contact Jim directly.