As short
sales are becoming more common, I’m finding that a higher percentage of
people who contact me regarding a short sale are still current on their
mortgage(s). Many of them have just made the last mortgage payment
that they can afford to make, while others are trying to develop a
strategy that will produce the best results for their situation.
While I typically recommend paying for basic necessities like food,
shelter, utilities, clothing, and basic transportation first, sometimes
it’s just not possible to continue paying a mortgage payment that is
well above an affordable level. While I cannot advise anyone on
whether or not they should stop making their mortgage payments, here
are
ten things to consider:
- If your mortgage is FHA insured, you’ll typically need to be at least 31 days behind on your mortgage before they’ll consider a short sale.
- For other types of loans, some lenders will approve a short sale if your payments are current, and some will not. It depends on the underlying investor, and some banks service loans for many different investors.
- The short sale process may take longer if you’re current on your mortgage payments.
The bank usually won’t feel that there’s a risk of getting the house
back if you’re current on your payments, so they may not be as
motivated to work on a reasonable timeline. A good real estate agent
with short sale experience may be able to assist you with the wording
in a hardship letter so the bank understands that even though your
mortgage is current now, default is imminent.
- If you stop making your mortgage payments, it will have a negative effect on your credit. Therefore, you should make sure you handle anything that would be impacted by negative credit before you stop making payments--And
that doesn't mean going out and buying a new car or furniture on credit
then not make your mortgage payment. Securing a place to rent could be
impacted by negative credit, but this is usually done much later, and
you may be able to explain the circumstances to a prospective landlord.
- If you have significant liquid assets (cash in the bank, CDs, whole life insurance policies, or other investments), the bank may require you to put up some cash at closing or sign a promissory note as a condition of approving a short sale,
regardless of your mortgage payment status. IRAs and other retirement
plans are typically exempt, but that won’t necessarily stop the bank
from trying to ask for these funds. I’ve heard of situations where
sellers were tricked into borrowing from their IRAs to pay back
mortgage payments or cover deficiencies on a short sale.
- If you stop making your mortgage payments, the bank will attempt to collect the back payments.
If you have two mortgages, the second mortgage lender will probably
harass you much more than the first mortgage lender will. The second
mortgage lender is also much more likely to use unscrupulous and
unethical collection tactics. Be prepared. It’s a lot easier to deal
with if you know what to expect.
- If you have a second mortgage and stop making your mortgage payments, the second mortgage lender may tell you that they won’t approve a short sale if the second mortgage is delinquent. This is a collection tactic and is not true. In fact, the exact opposite is often the case.
- Borrowing from a credit card to make your mortgage payment is not recommended. I have yet to come across a situation where this actually ended with a positive outcome.
- If you stop making your mortgage payments, it could eventually lead to foreclosure if you are not able work out something with the bank or have a short sale approved.
- If the bank determines that you have enough income to make
the mortgage payments, they may not approve a loan modification or a
short sale. However, the bank may make an exception in
special circumstances like divorce or an out of area job transfer,
where staying in the house may not be an option.
If you also have credit card debt, here are some things to keep in mind:
If
you’re unable to continue making your mortgage payments and intend to
do a short sale, staying current on other debt outside your mortgage
(car payments, credit cards, etc.) will typically make it easier to
secure a place to rent after the short sale is complete. It will show
a prospective landlord that although you had stopped making your
mortgage payments because the payments were more than you could afford,
you are able to make lower rent payments, and the mortgage situation
was an isolated incident. Many people in short sale situations would
have sold their house before they fell behind on their mortgage
payments if they would have been able to sell their house for enough to
pay off their mortgage.
- Some banks may check your credit before approving a short sale. If
they find out that you stopped making your mortgage payments but have
stayed current on your credit card payments, they may reject the short
sale offer. I’ve only heard of this happening once, and it was with
Bank of America. It’s unclear whether it was just a threat or if the
underlying investor actually required that. However, consider this a
warning—It could happen.
Make sure you understand the foreclosure timelines. See my blog post,
Foreclosure Process and Timelines in Washington State for timelines in Washington State.
In the end, the decision is up to you. There may be risks and
consequences regardless of your decision. Just make sure you have all
the facts so you’re making an educated decision.