05 Feb Should I try a short sale of my home if Iâ€™m filing bankruptcy anyway?
In my opinion, you should attempt a short sale, even if you are filing bankruptcy. Hereâ€™s why:
A typical scenario in my office these days involves debtors behind in their mortgage(s) with no desire to keep their home. The reason for this is typically because there is negative equity in the house and the mortgage payments have become too high. These debtors sometimes have other debt and sometimes not. Their primary question they have for me is, “What do I do about the house?”
Six months ago, I would have advised to stop worrying about the house because thereâ€™s not much to do. Deeds in Lieu of Foreclosure and short sales, where the mortgage company allows the borrower to sell the house at a loss, were rare. Just look at the BLN post from Fort Meyers Bankruptcy Attorney Carmen Dellutri dated October 30, 2007.
While I agreed with Carmen when he wrote that short sales are a joke, the environment seems to be evolving. Maybe mortgage investors are tired of building their inventory of abandoned homes.
I recently spoke with a good friend of mine who is one of Jacksonvilleâ€™s most successful RealtorsÂ®. She told me that she has seen a much increased short sale success rate lately. Last week was her busiest week in more than a year.
In general, she states that right now banks will approve short sales that pay them 80% of the balance due, and the second mortgage company, if any, will agree to the short sale for $5,000. So in order to calculate the feasibility of a short sale, the realistic FMV must be greater than or equal to
(1st Mtg balance x .08) + 5000 if 2nd Mtg + est. closing costs
For example, letâ€™s say you have a home with a $325,000 first mortgage and a $35,000 second mortgage. Based upon comparable sales, the true FMV is $300,000. A short sale is possible because a sales price of at least $285,000 would most likely be approved. Do the math:
(325,000 x .08) + 5000 + 2500
A short sale doesnâ€™t get the homeowner out of the woods. The second mortgage, and probably the first mortgage, will sue the debtor in an attempt to collect the deficiency caused by the short sale. In short, the debtor avoided the foreclosure, but will need to file a bankruptcy anyway.
So, why bother going through the hassle of a short sale if bankruptcy is inevitable? Most credit experts agree that mortgage lenders look more favorably upon a bankruptcy that doesnâ€™t include the house. While it is true that bankruptcy stays on your credit longer than a foreclosure (10 years versus 7 years), I have some bankruptcy clients that qualify for a home mortgage as little as one year after discharge. This is especially true if the bankrupt debtor has taken steps to reestablish good credit. People with foreclosures on their credit historically have a much tougher time getting their next mortgage.
The next logical question is, “Is a lender more likely to approve a short sale if Iâ€™m already in bankruptcy?” I do not have a definitive answer yet, but it would seem so, since the mortgage company KNOWS that it will get nothing from the borrower except the house.
Latest posts by Chip Parker, Esq. (see all)
- Can I Lower My Car Payment in Bankruptcy? - April 15, 2017
- How Will Bankruptcy Affect My Credit? - March 28, 2017
- Will the Mortgage Forgiveness Debt Relief Act be extended? - January 18, 2017
- How will my bankruptcy affect my spouse’s credit? - February 15, 2016
- Bankruptcy is an excellent retirement strategy - January 15, 2016