Las Vegans John and Lenore were in trouble. They received a notice from their mortgage lender that their house payments were doubling – from $1,500 to over $3,000 a month. Lenore had just been laid off from her job and John, a professional fighter, worked sporadically. They’d planned on living off their meager savings until John’s next bout or until Lenore found other work. With the change in their mortgage, however, they’d be wiped out within just a few months.

To add insult to injury, their real estate agent told them the house was worth $71,000 less than what they owed the lender. The clincher? The bank refused to work with them on restructuring the loan.

John and Lenore were on the leading edge of the mortgage crisis among the first victims long before the creation of fancy loan modifications and other bailouts. It came down to where they had three choices:

• Sell the house via a short sale.

• Let the house go into foreclosure.

• File for bankruptcy.

Today there are additional options for distressed homeowners, with many finding help in a variety of places.

If you’ve run out of options, though, and the reality is that you can no longer afford to remain in the home, the decision of what to do next is gut wrenching. Make sure you qualify for a short sale, if that’s the option you are considering. You must meet all of the following basic criteria in order to short sell your home:

• You must have a hardship, such as job loss, major illness or divorce. Lenders won’t consider a short sale unless you can prove to them that you have a hardship that prevents you from meeting your monthly mortgage obligation.

• You must owe more on the house than its current market value. This situation defines the short sale.

• You must be insolvent. The lender will want proof that you have insufficient resources, such as savings, to pay down the loan.

Things to Consider Before a Short Sale

When attempting to decide if a short sale is your best option, consider the following:

Credit Ramifications

Don’t make your decision on whether or not to short sell your home based on the misinformation in the marketplace about short sales. They are no better on your credit record than foreclosures and deeds-in-lieu of foreclosure. The Fair Isaac Corporation, the folks that compile your FICO® score. treat all three as accounts not paid as agreed.

Can the Lender Sue You for the Deficiency?

If the lender obtains a deficiency judgment, you may be chased down, sometimes many years after the short sale. for the amount owed after the sale of the home – the deficiency between what you owed on the loan and the proceeds of the sale.

Some states, such as Florida, allow deficiency judgments. Others, such as California, have enacted laws to protect distressed homeowners from future liability. The details may be confusing to some, but it’s important to know if you live in a state that allows deficiency judgments. This is a good question for your attorney, who can also fill you in on the specifics of your state’s statutes.

Regardless of future ramifications, you may still want to short sale your home. Just be extra careful in the choice of your real estate agent. A highly experienced short sale expert knows what to look for in the lender’s fine print. Words such as “collectable balance,” will set off alarms for this agent, alerting her that she needs to do some serious surgery on the paperwork and reopen negotiations with the lender.

Buying Another Home After a Short Sale

If you hope to purchase another home within two to four years, a short sale may be your best option. Depending on the loan-to-value ratio, Fannie Mae will consider lending to you within that time period, whereas the wait is seven years after a foreclosure. FHA treats the short sale and foreclosure the same, however, and won’t insure a new mortgage for three years.

Bottom Line

The home sale process is lengthy and typically quite stressful, and the short sale is no different. It may, in fact, take longer and involve a much higher level of stress. As the seller, you’ll need to keep the home in top condition during the marketing period. You’ll be asked to leave the home during showings. You’ll entertain offers, sign mountains of paperwork, deal with the snail-pace processes of the lender and hope that the buyer remains motivated during the process.

Look carefully at the literature urging distressed homeowners to choose a short sale over a foreclosure. Who stands to gain the most from this type of transaction? The real estate agent will get a commission. Generally, the lender realizes a larger profit in a short sale than in a foreclosure sale.

What does the homeowner get? Some larger banks are now offering selected homeowners cash to remain in the home and care for it during the short sale transaction. How they choose which homeowners to offer this incentive is a mystery, so it may or may not come your way.

Keep in mind that, during the short sale process, you are, in essence, selling someone else’s home for them. Consider what’s in it for you before putting yourself, and your family, through the process.

I paid 64,000 for my house I dont want it anymore, I woud like to at least 15,ooo out of!i dont know all the peas and ques so some info would be acceptable ty sincerely Janis Dutton home owner 1/9/14

I run a Specialist Property Buying company in the UK called Property Selling Expert and we deal with distressed sellers in a similar situations day in day out.

When the mortgage exceeds the value of the property and arrears have built up, we advise speaking with the lender to ask if it would be possible to temporarily adjust the monthly mortgage repayments. It doesnt work every time but theyre certainly more keen to listen if you get in touch early rather than bury your head in the sand and allow arrears to accumulate.

Secondly, some lenders may be forgiving and permit part of the mortgage debt to be written off to facilitate a sale.

If you dont ask, you dont get.

We had made an offer on a short sell and the BOA came in lower. Four weeks later we find out that Lender is selling its loans to another bank. Another BOA is coming out Has anyone had this experience and if so was the process shorter?