There are special circumstances where the house sale alone will not be sufficient to cover the existing mortgage loan. In real estate terms, the house is then said to be underwater, meaning its market value is less than the outstanding mortgage loan balance.
If you want to sell your house for cash in this state it is not advisable; it will trigger the ‘due-on-sale’ requirement. You will be forced to pay the bank out of pocket to cover whatever is still outstanding after the sale proceeds have been applied to prevent a short sale.
For the sale to be financially sound, you are better off continuing with the monthly payment until you break even or beyond.
Short Sale
Unfortunately, the luxury of postponing the sale is not always available. Circumstances push homeowners into selling prematurely, and you will not be the first if you are in this position. It could be a need to relocate urgently or that you cannot keep up with the expected monthly repayments for one reason or another.
When the bank approves a short sale, they allow the house to be sold at a price less than the outstanding loan amount to mitigate further loss by both parties. They will then write off the outstanding debt as bad or give you a chance to pay it off gradually.
If the lender writes off the balance of a short sale, it is technically considered a loss to them and a profit to you as the home seller. You might be forced to pay income tax on this earning. They report it this way, and it lingers on your credit report for some time.
Although it’s not as bad as a foreclosure, it will still restrict your access to credit. You can avoid this kind of report by offering to pay the difference over time.
You should negotiate with the lender to draft a repayment plan for the outstanding amount. You can spread the expected monthly contributions over a longer period so that they are manageable alongside your other monthly expenses.
Considering your demonstration of good faith and faced with the alternative of declaring it a loss, the lender will be inclined to accept this offer, especially if your credit history is favorable. You want to maintain this positive report in case you need financing in the near future.
Foreclosure
Allowing the bank to foreclose on your property should be the last option after everything else fails. The record will stay on your credit score for a long time, preventing you from accessing credit facilities. It is also a loss to the bank as much as it is a loss to you.
Unfortunately, sometimes it is too late to stop a foreclosure. The circumstances can be so deplorable that even short sales do not make sense.
The homeowner will have demonstrated beyond question that they cannot pay the mortgage, even with adjustments in the repayment plan.
This often couples with an extremely negative equity position where the outstanding loan amount is much higher than the house’s market value.
It may be the result of a drastic fall in housing demand or because the house is in a glaring state of disrepair.
Foreclosure is considered a better option in such cases than racking up interest and penalties that will not be paid at the end of the day.