Help! My House Is Worth Less than I Owe!

Help! My House Is Worth Less than I Owe!

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“If I owe you a pound, I have a problem; but if I owe you a million, the problem is yours.”

—John Maynard Keynes

Many people are caught in the pickle of owning a house worth less than what is owed on it. In this case, dropping the price to meet the market conditions means they have to come to closing with cash to make up the difference between the sales price and the balance owed on their mortgage. For people who are financially strapped, this isn’t a viable option. A short sale is a possible way out for people in this situation.

A ‘‘short sale’’ occurs when the lender takes less than what is owed on the property in lieu of the full amount. Typically a short sale is done when the homeowner is in foreclosure or at least behind in payments, although some lenders will accept a short sale in markets where property values have substantially declined and the property is ‘‘upside down’’ on equity.

To accomplish a short sale, you need to convince your lender of three things:

  1. The property is not worth what’s owed on it.
  2. You can’t make the payments.
  3. You are essentially insolvent.

If you have a property that is upside down but have other assets and substantial income, your lender will probably not be willing to accept a short sale on the property. The logic is that if you do have the means to pay but are just not willing to do so, the lender is not exactly thrilled about taking the hit on the debt owed. On the other hand, if you are up to your ears in debt with the property and are considering walking away from it anyway, you are a good candidate for a short sale. Walking away from a property means the lender will foreclose, and your credit will be ruined. Furthermore, if the foreclosure auction yields less than the lender is owed, the bank could sue you for the difference between what is owed and what the foreclosure auction yields, which is called a ‘‘deficiency.’’ A deficiency is generally pursued in a separate lawsuit by the lender, which ends up in a court judgment that is valid for 10 years or more. The good news is that lenders don’t routinely seek a deficiency judgment and try to collect because the efforts are usually fruitless. And, if you file for Chapter 7 bankruptcy, it will generally wipe out your liability for a deficiency.

Why Would a Lender Accept a Short Sale?

You may wonder why a lender would accept a short sale on the property for less than it is owed. Consider the lender’s position— with a record number of defaults, lenders are in a tough position nationwide. The last thing it needs is another foreclosure to deal with. Secondly, the lender loses money by foreclosing a property, even if there was equity. Attorneys fees, lost opportunity cost, broker fees, and damage to the property all add up to lost revenue for the lender. And with a declining housing market in many areas of the country, the property will be worth even less by the time the foreclosure is finished, which can take up to a year in some states. In other words, lenders like short sales because it allows them to cut their losses early and solve a problem. It’s a win-win scenario for the lender and the homeowner.

If your home is worth less than you owe, then White Sands can help. White Sands pays cash for homes in any condition.

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