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Ah, Just Let the Bank Take the House

Why foreclosing on a house without trying a short sale first is not the best idea.

Over the course of the past couple years, this is something I've unfortunately heard more than twice.  As anyone who has followed the mortgage and real estate markets even remotely, foreclosures and short sales have often become topics of conversation. A short sale is where the fair market value of a house is less than what is owed on a property and there is a financial hardship on the owners of the house. Simply having a mortgage more than fair market value does not constitute someone being a candidate for a short sale, because in many areas, would be a pretty large number of people. 

I was recently approached by someone who asked me whether or not here in Massachusetts if their mortgage company could go after them post-foreclosure for the difference owed and what the bank's ultimate selling price would be.  Short answer verified by a short sale negotiator whom I work closely with: YES.   

When I asked them why they would prefer such a long-lasting, dramatic route such as a foreclosure over at least trying a loan modification or a short sale, their reasoning was that they figured it would be better for them to save their money by not paying the mortgage and still get to stay in their house for another year or so before they got "required" to leave the house and that it would be worth the risk. They knew that short sales can often take a while and that they didn't want to get foreclosed on in the meantime.  Has this happened?  It has, and it's not a perfect system in a perfect world.  Communication, diligence, expertise on the parts of the negotiators between the sellers and the lienholders, as well as full cooperation on the ends of the homeowners is required at all times, and even then that doesn't guarantee a short sale getting approved, although it significantly increases the ratio of times that a homeowner can be helped rather than just throwing in the towel too soon, be it from frustration, pride, or just not knowing where to turn.

Even if I wasn't a real estate agent or realtor(r), I could never in good conscience recommend someone just walk away. It has nothing to do with whether or not I make a sale; the repercussions of a foreclosure affect all of us: families, neighbourhoods, overall market, perceptions such as the one above, and most importantly, your own ability to make as clean as a fresh start as possible.  Believe me, the money we do make compared to the extra work and risks put in do not always even out in our favour, so when I've heard it suggested that we as agents just want people to short sale because it's a sale for us, I cringe and know in my heart that those who unfortunately do try to capitalize on the distress of others, it will come around someday.  In the meantime, the rest of us just want to help as best as we can.   

There are zero reasons I can think of where foreclosing would be a better option than a short sale. Does a short sale always work in every instance?  No, unfortunately for a myriad of reasons sometimes even unbeknownst to us despite best efforts and total logic, they do not. People whom I've spoken to even casually who in the heat of the moment, say, post-divorce for one example, who have said "oh, just let the bank have it," have told me that they later regretted such a scarring decision to stick it to the other spouse or to the bank.

Are you hurting the banks' feelings?  Hardly. Does it affect the other borrowers or owners on your loan? Certainly can, and that's not a clean break emotionally nor financially. It is a classic example of cutting noses off to spite the face. The damage to credit ratings, EVEN IF credit is already damaged by for other reasons that could otherwise be repaired more quickly in time, is so significant that it can affect perception of credit-worthiness even in the more immediate future such as when a former homeowner now goes to try to rent a house or apartment and is turned down as an applicant.  

There have been rental clients I've had who have tried to rent a house and been turned down simply because they were mid-short sale and their credit was still reasonable!  Many jobs now require credit reports, at some point you may need a new loan for a car or other personal reasons, and do you think the mortgage company that you stuck it to in the past is feeling hurt that you didn't pay them on purpose because they didn't work with you or because you wanted to aggravate an already emotional situation?   Not a chance.

One of the primary reasons that a successful short sale is favorable to a foreclosure or even a "deed in lieu of foreclosure" is due to that in our state, we cannot simply walk away without recourse. A fully successful short sale will result in the lender waiving their rights to what they call a deficiency judgement against a struggling homeowner.  

Short sales can happen for many reasons. Although not everyone may qualify, they are a commonly used option for homeowners who may not have qualified or wanted to pursue a loan modification with their lender.  The stigma that may have formerly been associated with them are not as significant as they were at first.   Even now on our Multiple Listing Services (MLS), it's a required field to complete as a disclosure; one that evolved from not being there at all, to being in the agent-only viewable field, to now a publicly viewable disclsoure.   It's okay if you genuiniely need to short sale your house.  We don't pretend to think it's an easy decision or one that you may be proud of sometimes, but it's really okay, we are not here to judge, we are here to help you navigate an often confusing  but doing the right thing for yourself and your family long-term will feel much better than the taste of crow when the reality of the effects of foreclosure linger later. 

If you or someone you know is facing a challenge with keeping up with mortgage payments because of any major lifestyle change that would genuinely affect the ability to afford the house, contact an agent or attorney experienced with short sales and discuss what options are best for you.   I can almost guarantee that they won't say foreclosure is one of them.  

This post is contributed by a community member. The views expressed in this blog are those of the author and do not necessarily reflect those of Patch Media Corporation. Everyone is welcome to submit a post to Patch. If you'd like to post a blog, go here to get started.

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