Short Sales as a Stepping Stone to Homeownership

Borrowers today have more options than ever keep their homes, ranging from proactive lenders reaching out to modify loans, to government and regulatory actions aimed to prevent more foreclosures. Moreover, today’s borrower takes a more prudent approach to their credit obligations, as evidenced by significant declines in consumer debt and delinquency levels across the board. However, there are still homeowners that have absolutely no backstop the ruin of a foreclosure. Usually, the only option left other than foreclosure is a short sale, which under today’s conditions is more favorable alternative. The lender accepts a lower price for the loan amount in return for removing  a non-performing asset off its books, and borrowers dodge the horrors of foreclosure by selling it. This is where the conversation usually ends with most short sale discussions.  Distressed borrowers, however, should be able to leverage the short sale process as a stepping stone that helps them gain a stronger financial footing to recoup their most valued asset --- a home.


First and foremost, distressed borrowers must be honest with themselves about their predicament when considering a short sale. They have to acknowledge early in the process that at some point in their near future they will not be able to make either their current mortgage payments, or even sustain reduced mortgage payments they would be eligible for through loan modification. This is the critical juncture where they decide relinquishing the home through a short sale is a viable route. The short sale wipes out the debt on the first lien, and many short sale negotiations include the cancellation of the debt owed as a result of difference between the remaining loan amount balance and the final sale price of the home. Borrowers may also be entitled to cash incentives through the government, the lender, or a combination of both through a short sale transaction. Moreover, a short sale clearly has a significantly smaller impact on a borrowers’ credit rating than a foreclosure. These are the obvious advantages to considering a short sale.
While it may appear that distressed homeowners initially lose their most valued asset, the long-term outcome is more optimistic. The true goal is actually for the distressed homeowner-now home seller to position themselves to comfortably handle the responsibilities of a mortgage for the long term. By relinquishing the debt of the original mortgage through the short sale, homeowners give themselves an opportunity to regroup financially and develop a savings routine based on new budgeting strategies. The fresh start allows the former homeowner to address other outstanding debt, and as a result build a stronger credit profile that would have a better chance of meeting today’s strict lending guidelines. The most important advantage to the former homeowner is that home prices, compared to when the original home was purchased, will be far more affordable when they are ready to enter the market again. While today’s low home values are projected to rise in the next cycle of the housing industry, they won’t approach the highs of the last cycle.

The homeowner who takes the high road by strategically exiting the mortgage via short sale has the opportunity to return as a homeowner on more stable footing with a home and mortgage that can be sustained.