Underwater homeowners are asking, “Should I short sale my home?” Money Girl has 3 tips for how to handle this dicey situation.
by Laura Adams
A Money Girl podcast listener named Ronda R. asks:
“I own a condo that I can’t sell because I owe about $20,000 more than it’s worth. I’ve been renting it out since I relocated for work, but the income doesn’t cover my mortgage and condo dues. Should I short sale my home and ruin my excellent credit—or keep the condo and hope the market improves?”
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At least 25% of U.S. homeowners are underwater, which means they have a mortgage balance that exceeds the market value of their property. For instance, if Ronda owes $170,000 for her condo and sells it for only $150,000, she could be forced to “short” the lender $20,000.
Being underwater on a home is especially difficult when you need to relocate to be near family or accept a good job offer. Here are the 3 best options for Ronda to get out of her financial jam:
Option #1: A Mortgage Modification
Ronda’s first move should be to contact her lender to discuss the situation and review every option. She may be eligible for a no-fee mortgage modification, to reduce the interest rate and monthly payment.
A modification could bring her total monthly expenses below the rent income, making it affordable to keep the property. If Ronda believes her condo’s market value will eventually go up, then she could sell it later on when she would no longer be underwater. This is definitely her best option.
Option #2: A Cash-In Sale
If Ronda has enough cash to cover the expected mortgage shortage at closing, she could sell the condo for the best possible price now and pay the difference out-of-pocket.
If she doesn’t have enough cash right now, doing a modification could help her save up to pay for a shortage—especially if she could raise the rent and make a modest profit each month.
Option #3: A Short Sale
If Ronda isn’t eligible for a mortgage modification, can’t do a cash-in sale, and can’t afford to rent the property at a loss, she should discuss a short sale with the lender. Depending on where you live, a lender may be able to sue you for their loss in a short sale—so never do one without getting a lender’s approval first.
However, in many cases, a lender would rather work with a distressed homeowner and take a small loss from a short sale than to risk default on the entire mortgage.
Another downside to a short sale is what Ronda mentioned, damaged credit. A short sale means you don’t pay your mortgage off in full, which remains on your credit report for up to 7 years.
Ronda could negotiate to have the lender report the debt to the credit bureaus as “paid in full,” but they aren’t obligated to comply with that request.
To fully understand her options and potential legal and tax liabilities, Ronda should consult with a real estate attorney before moving ahead with a short sale.
Other Articles and Resources You Might Like:
Should I Pay Off My Mortgage or Invest?
Best Tips to Improve Your Credit Score Fast
7 Things to Know About Adjustable-Rate Mortgages (ARMs)
Get Your Free Credit Score (Without Hurting Your Credit)
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Underwater on Calculator photo from Shutterstock.