Mighty Mortgages

The unfortunate fact of our recent serious economic downturn is that significant numbers of people are losing their jobs and are being forced to take new positions at lower rates of income. This problem is compounded by falling housing values which are also a result of current economic conditions. People have been losing their homes for the last 18 months due to the sub-prime mortgage crisis and it is much harder for buyers to get financing to purchase homes. Too much supply and not enough demand cause values to fall.

Homeowners in trouble find themselves with negative equity in their home because they actually owe more on their mortgage than what it is worth. Once payments start to fall behind, they think that foreclose is their only option or even inevitable. While that may be true in some circumstances there are other solutions.

A mortgage short pay, also called a mortgage short sale, is another very real option. This is essentially when a lender will agree to accept less than full amount owed on the loan instead of foreclosure. You may wonder why would a bank let you get away with this, but you need to understand that it is their best interests as well. Banks don’t want to be in the real estate ownership business, especially in this market. Additionally the foreclosure process can be long and costly and carry its own uncertainties. If the financial institution can limit its risk and loss to a predetermined acceptable amount than they are more likely to agree to this type of arrangement.

This isn’t to say that a bank opt to do this lightly. Banks are not in business to let people off the hook for their financial debt obligations easily. A mortgage short sale is a last resort resolution when a foreclosure is all but a certainty and the circumstances will need to be established as such.

If you can no longer afford the payments, but you could sell the home and pay off all the debts against it, then you should definitely do that. It is not otherwise worth it to risk permanent damage to your credit rating. If there is enough equity in the home to cover all of the banks expenses if they were to foreclose then they will not consider a short pay either.

If there are multiple lenders who have security interests in the property then negotiating a mortgage short pay gets considerably trickier. If the lender who has first position can foreclose and fully cover the amount owed plus costs, they will likely not agree to accept anything less. Likewise if a second or third position lender is not going to benefit from the deal, then there is no incentive for them to be cooperative either.

The first step in beginning the short sale mortgage process is to contact the lender(s). By phone or mail is fine, but essentially this is just a fact finding mission. You want to gage their receptiveness to the idea and find out exactly what information and supporting documentation they require to consider your proposal. This will vary from lender to lender, but you can expect to provide considerable information regardless, topped off with a well written hardship letter. Remember this is a last ditch effort to save your credit and you are asking the bank to take a loss. While they may agree, they are going to want to be convinced that there really is no alternative. Fannie Mae, Freddie Mac and private mortgage insurance (PMI) all add a layer of complexity.

After the proceedings have concluded you may get a form 1099 from lender’s loss. There is usually no lasting impact to your credit report as the debt is reported as paid in full. Occasionally it may be reported as settled, but in either case it is much better than having a foreclosure recorded on there.

In today’s tumultuous real estate environment, with decreasing property values, many homeowners are finding themselves owing more on their mortgage than their home is worth. Further more they were giving a mortgage that was beyond their means and now have come to the realization that they can not afford the monthly payments. They can’t sell the house because they can’t get enough for it to payoff the mortgage. Bankruptcy is looming and appears to be the only option. Or is it? Enter the mortgage short sale.

A mortgage short sale, or short pay as it is sometimes called, occurs when the lender agrees to accept less than the full balance of the mortgage to consider it paid off.

It is in the financial institutions best interest to accept a short pay mortgage if it is likely they will end up in a foreclosure situation. Banks do not want to own real estate. It is not their strength and can end up being a very costly proposition for them. The property needs to be maintained or repairs need to be done before it can be resold. And then they are not going to get enough for it to recover the lost mortgage, because you already determined that the loan balance exceeded the homes fair market value. So they are going to end up taking a bath on it regardless. It is in their best interest to minimize their losses and move on.

The borrower needs to demonstrate to their lender that they really are on the brink of bankruptcy. They need to illustrate that the home can not be sold for enough to pay off the mortgage and that accepting a mortgage short sale is going to save the bank more grief and expense later on. This is often best done by writing a letter and attaching any applicable supporting documentation.

This will not work all time. If there is not a big discrepancy between the amount owing and the appraised value then the mortgage company likely won’t go for it. But these deals are done all the time and being aware that a mortgage short sale is a consideration, can possibly save you from the anxiety of a foreclosure and keep your FICO score in tact.