Before you ever stop making payments, if you are thinking of it please consult your attorney.
But let’s probe the question and pro’s and con’s of stop making payments during a short sale…
First of all let’s lay out the truth. You do NOT need to be in default with your lender in order to do a short sale. It is not true.
Do many Realtor’s think it is? Yes, from my experience. Does it make you more likely to be successful if you are behind on payments based on my personal experience? Yes. BUT… That does not mean you have to. This is a very important BUT. Read below to see the reasons/positive impact to NOT missing payments while attempting a short sale.
Many Realtor’s tell their clients that that if they have not and will not miss payments they will not be successful in a short sale. But, this is not true… it’s just not as common and I think that advise comes out of that.
A good attorney I know advised a client this way:
You don’t have to miss payments… but will most lenders act quicker on a file that is not current(behind on payments): Yes.
Then he said,
Some client’s don’t have a choice due to financial hardship. And, if they have decided to “let go” of the property for economic reasons I have heard an attorney say, “why would you keep putting money into it”. That money could go toward your health care, your food, your job hunt, your rent at your next apartment. etc.
He said, here is a sum up of some negatives of not making payments:
It negatively impact to your credit score.
There will be a negative impact of short selling on your score anyway… Broadly your score seems to drop 100 to 200 points on average after a short sale (from an informal survey I did of clients who shorted recently). A foreclosures is a 200 to 300 point hit from my research online.
Then, according to Fannie Mae guidelines you will not be given a conforming loan to buy a home for at least 2 years.. and potentially up to 5 years. One of the problems is that Fannie sees all short sales as the same–meaning if you had a “good” reason to short sale or a “bad” one. Your still in the same category and it will be hard to get a loan for 2 to 5 years.
If you miss payments… where it can lead it that you end up in foreclosure. If you paying(by your attorneys’ advise) during the short sale process and the bank rejects/says no to the sale offer we would find you/buyer’s offer… you could end up losing the home to foreclosure. Obviously.. .this would happen anyway if you couldn’t pay the loan anyway.
According to the attorney, if you could afford to make the payments… here are the reasons you would want to make sure you would make payments during the short sale…
First, if you can afford it helps you because more than likely you will be able to get an FHA loan if you were not late on any of your mortgage payment.. in the future. Reading over the Fannie Mae guidelines issued in August of 2008, it turns out that you are also supposed to be able to get a conventional loan if you do not have to pay back the lender the “short fall” and did not become delinquent during the short sale. Even though this is in the guidelines.. many lenders don’t interpret it this way. But you might find one who will go along with the positive interpretation. Then lending industry is in flux right now… so we will see where this issue ends up over time. But there is some hope for you to buy sooner if this plays to your favor.
If you keep making payments… it does help protect your credit to some extent although the lender can still report your short sale which will effect your FICO score. This is recognized as Credit Score Factor Code #22.
If the short sale is not successful/is rejected…you will still be current and not in jeopardy of losing the home.
Emotionally it is much easier to short if you have not fallen behind in your mortgage payments. The guilt trip that the lenders are laying out in the cable tv land by creating the issue into an emotional one instead of a business one is effective.
Ok.. so to wrap up.. you have heard some of the positive and negatives that were given to a client recently who sat and asked the questions.. do I have to miss payments to short sell. I guess if you are asking you likely can still make the payments and weighing the impacts and positive / negatives are important and again… I encourage you to process this for yourself and your situation and consult your attorney.
-Phil Buoscio, Broker Better Living Realty — Buoscio Brokerage Inc.