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July 27, 2019

Can I Sell My Home If I’m Behind on Payments?

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If you are behind on your monthly house payments and don’t foresee having the ability to get caught up with them, you may think about trying to sell your home to get out from the being under the payments.  Can you sell your home when you're behind on your payments?  Yes you can!  Provided of course, that your lender hasn't foreclosed on you.

Banks start the foreclosure process when you fall behind on your mortgage payments.  Sometimes all it takes is missing one payment, and you may receive a foreclosure notice in the mail.  When you fall more than 120 days behind on your payments, your lender legally has the authority to reclaim your home and sell it to recover the money they are owed.  During this process, you will be forced to leave the home, sometimes by the Sheriff's Department.

As if that wasn't bad enough, foreclosures go your credit report and may lower your credit score by 300 points, maybe even more!  This can have an extremely negative impact on your ability to get a credit card, a car loan, a cellphone plan, get utilities in your name, and worst of all, it may impact your ability to get a job or promote at work!  In some fields (like retail management) having a foreclosure can automatically deny you the job.  Having a foreclosure will also prevent you from obtaining a new home loan for at least five years.

Luckily, you have up until the day of foreclosure to sell your home.  The process of selling you home foreclosure isn’t an easy one.  Here are some of the basics you'll need to know.

Can you sell a home if you’re behind on your payments?

One of the biggest determining factors is if your house is worth more or less than what you owe on your mortgage.

If you have fallen behind on your payments but owe less than your home is worth, you can sell your home, pay back your lender and have some money left over to start the next chapter in your life.

If you decide to sell, the process to sell your home is no different than normal.  You would hire a listing agent (like Huggins Homes), receive and accept an offer, and proceed through the escrow process.  Generally, you do not need your lender's permission to sell your home in this circumstance.

On the flip side, if you owe more on your home than it is worth on the open market, then you would need to do what is known as a short sale.  The main difference here, is that the lenders would need to agree to accept less than what they are owed, and they do not have to agree to it.

How does a short sale work? For the sake of discussion, let us pretend that your home is worth the median Ventura County home price (as of when I'm writing this) of roughly $600,000 and that you owe $700,000 on the home.  Now let's assume that you get a full price offer at $600,000, that would still leave you "short" $100,000 for what you owe the bank.  This may be acceptable, but your bank has to agree to take a $100,000 loss on the loan.

Getting the approval from your bank to do this isn't always easy, after all would you like to invest money and take a loss?  No, you wouldn't!  The saving grace here, is that if the bank forecloses on your home they become the owner and then have to go through the hassles of selling it and there is no guarantee that they will get the $600,000 offer, plus they will have additional costs association with holding and selling the property.  Naturally the smaller the difference between the offer you get and the amount owed, the more likely the bank will be to accept it.  That's why having a quality real estate team, like Huggins Homes, on your side is so important!

Before approving a short sale, your bank will perform it's own due diligence.  They may require you to send them proof of your hardship and any supporting documentation (such as medical bills, unemployment, etc.) to show that you can no longer make your payments.  Additionally, they will likely have your home appraised to determine if the offer received is a fair offer.  If everything checks out, they may allow you to short sale your home.

Unlike a traditional sale though, the lender has the final say in which offers get accepted and what terms are acceptable.  They will often counter the offer with terms and demands to minimize their expenses.  Examples of such terms may include "Buyer to pay all transfer taxes" or "Buyer to pay HOA transfer fees" or "Seller is responsible for wire transfer and notary fees."  Another common one is "Inspections are for informational purposes only, seller will make no repairs."

Ultimately, the decision on whether or not to accept these terms is up to the you and the buyer, but they can be a small price to pay to keep a foreclosure off your record.

As a homeowner, a short sale is preferable to a foreclosure.  Both will impact your credit score, but a short sale will have less of an impact than a foreclosure will.  In addition, with a short sale you get to stay in the home until the sale is complete.  If the bank forecloses and goes to court to get an eviction against you, the court records are public knowledge and anyone doing a background check can gain access to them.

Are there any alternatives to selling my home?

Yes, there are some alternatives.  You may be able to qualify for what is known as a "mortgage forbearance" which gives you a temporary reprieve from having to pay your mortgage.  This essentially "pushes the can down the road" on your payoff date.  So if initially you had a 30 year mortgage due to be paid in July of 2033 and you get a six month forbearance, your mortgage is now scheduled for payoff in January of 2034.  Note that your interest may still accrue during this reprieve period.

Another option is to get a loan modification.  With this option, your lender will allow you to renegotiate the terms of your loan, however you will need to keep up with your payments.  Failure to do so may result in the modification request being denied.

Have other real estate related questions?  Check out our Q&A section here.

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