If you find yourself in financial difficulty, with a home that is worth less than your outstanding mortgage, you may be considering a short sale. While many people think this is their only choice to avoid foreclosure, there are other alternatives to a short sale.
What are the other alternatives to a short sale? Less well-known alternatives to a short sale include:
- Keep Paying The Mortgage
- Modify Your Loan
- Buy A New Home & Rent Out The Existing One
- Pay Off The Loan
- Refinance Your Home
- Reinstate Your Loan
- Negotiate A Forbearance Plan
- Lease To Sell
- Sell The Home & Make Whole
- Pass The Mortgage
- Negotiate A Deed In Leu Exchange
- Walk Away
Some of these alternatives to a short sale will not be available to everyone, others are not particularly appealing. To work out if any of these are suitable for you, let’s take a look at the details of each.
What Are The Alternatives To A Short Sale?
The alternatives to a short sale fall, broadly, into two categories. The first category is where you keep the property and the second is where you don’t.
Alternatives To A Short Sale Where You Keep Your Home
To begin with, let’s stay on the positive side and take a look at the options where you keep your home.
Keep Paying The Mortgage
This sounds like a ridiculously obvious, or a plain ridiculous idea, depending on your perspective. If you cannot pay your mortgage then, yes, this will sound like a ridiculous suggestion.
I include this option for one very valid reason. Some homeowners who find themselves in the position where their property is worth less than the outstanding mortgage panic. They assume that their home will continue to lose value and as a result, they must unburden themselves from their mortgage as soon as possible.
This is not so. Don’t panic and automatically grasp at a short sale.
Some properties may drop in value only to bounce back again in the long-term. Contact a real estate professional and ask if:
- You overpaid for your home.
- The decrease in the value of your home is likely to be temporary.
- There have been changes to your property or the surrounding area that have caused a permanent devaluation.
You should then ask yourself how long you will have to make mortgage payments for your outstanding loan to be less than the home’s value, and whether you wish to stay in your home for that period of time – or longer.
If you’re happy where you are, consider staying.
Modify Your Loan
Go to the bank, explain your situation and see if there is any way to modify your loan. People assume that the bank would be unwilling to do this and instead would rather foreclose so they can take your home and make a huge profit.
This is not so. Banks rarely make any sort of profit when they foreclose on a home. They are primarily concerned with getting back the money they are owed, and that’s it. As a result, they are usually pretty open to at least discussing a way of modifying your loan so that you can continue to make payments.
Loans are modified in one of three ways:
- Lowering your interest rate.
- Extending the loan term.
- Deferring part of the principal balance owed.
The first two are the most common and you can find al of the information you need about loan modification, including advice on who qualifies for a loan modification, how to approach your lenders, and the documentation you will need, on the government’s Making Home Affordable website.
Buy Or Rent A New Home & Rent Out The Existing One
If you are in a position to buy a second, more affordable home then renting out your existing home can be a viable alternative to a short sale.
To make this work you need to be able to charge a rent that will cover all of the costs of your existing home, find a reliable tenant who intends to rent your home for the long-term, and find a new home for yourself with an affordable rent.
If you cannot do all of these things then you should seriously reconsider this option.
Pay Off The Loan
Again, an option only available to those who are able to afford it BUT still a viable option. If you have cash reserves, investments or family or friends who would be willing to lend you the balance then paying off the loan and waiting for your home to once again increase in value may be an excellent alternative.
This is especially true if you are struggling with your repayments to the bank and are on the brink of foreclosure, but have family or friends who will loan you the balance and will be more forgiving than the bank if you miss repayments.
Refinance Your Home
There are government programs that help with refinancing your mortgage. If your loan is owned by Fannie Mae or Freddie Mac you may qualify for the Home Affordable Refinance Program, also known as HARP which may allow you to refinance your entire mortgage.
If not, there are other programs that allow you to refinance a certain percentage of your loan to value.
Reinstate Your Loan
If you are behind on your payments, can manage them from this point forward your lender may allow you to make a single payment that covers all of your late payments and brings you back up to date.
If it is possible to borrow money from friends or family, cash out an investment or find another way to find the payment amount, that will not put you into financial difficulty, then this is an option worth exploring.
Negotiate A Forbearance Plan
On some occasions, if you wish to keep your home but are unable to reinstate your loan, you may be able to negotiate a forbearance plan as an alternative to a short sale.
If you are a homeowner having temporary issues and you can demonstrate an acceptable plan to catch up with late or missed payments this might be your solution. The homeowner approaches the lender, explains their situation and shows how they will be able to catch up in the future. If the lender is agreeable and feels your plan is sensible they will allow you to make reduced payments or even skip some payments entirely and then make up the deficit in the future, according to your suggested plan.
Alternatives To A Short Sale When You Want To Sell
Not everyone wants to keep their home when faced with a short sale situation. Sometimes you might find it preferable to move on.
That doesn’t mean you have to cut a short sale deal, especially when you consider that you may still be on the hook for the difference between what you owe and what your home sells for. Yes, you heard that right. You can still be held liable for any shortfall, let me explain.
Imagine you still owe $300,000 on your mortgage when you agree to a short sale. Your home sells for $260,000 which is $40,000 less than the amount you still owe. Your lender may pursue you for the $40,000 they are losing through the short sale.
Lease To Sell
If you are looking for a way to sell your property for more than the current market value, a lease to sell arrangement may be a viable alternative to a short sale. It works like this:
- A homeowner and a potential buyer negotiate a sales price for the property. They also agree for the sale to take place not immediately but at a later date. This date is usually between one and two years in the future. The price is usually higher than the current value because:
- The sale will take place at a future date by which time the property will have, hopefully for the buyer, increased in value.
- The seller is agreeing to hold onto the home until the end of the option and not sell to anyone else.
- The homeowner then sells the right to buy the home at a later date, to the buyer and not the home itself. This right is known as an option.
- The buyer pays the homeowner for the option and the seller keeps this payment.
- Once the documentation has been completed the buyer moves into the home and pays the selling a monthly lease payment.
- Part of the lease payment usually counts towards the eventual purchase.
The buyer is responsible for all costs associated with the propery including repairs and maintenance and is contractually obliged to buy the home at the end of the option. If they choose not to do so the option payment is non-refundable.
Some homeowners have used this process to get around the alienation clause of their mortgage loan. An alienation clause states that when the property is sold the lender must be paid any amount outstanding on the loan.
Today, some lenders will include clauses in their mortgage agreements that require a borrower to pay back any outstanding loan amount if they enter into a lease option agreement. Other lenders will allow this to go ahead, as long as you keep them in the loop.
It is crucial to obtain legal advice before entering into a lease option agreement not only to avoid issues with your lender but to minimize the potential for problems should your buyer stop making payments.
Sell The Home & “Make Whole”
It is possible to sell your home and pay the difference between the sales price and the outstanding mortgage amount at escrow.
Doing so will allow you to avoid a short sale and the possibility of being held liable, at a later date, for the difference.
Pass The Mortgage
If you can find someone to take over your existing mortgage this may be a good way for you to avoid a short sale. If this is your chosen route then you contact your lender and arrange a meeting between yourself, your lender, and the person who would like to take over your mortgage.
The person to who you are passing your mortgage must pass all of the same checks and also qualify for the mortgage in the same way that anyone applying for a mortgage will.
However, beware of the fact that the lender will charge an administration fee, may require a new appraisal at your expense and may also hold the original mortgage holder liable if the new mortgage holder defaults.
Negotiate A “Deed In Lieu Exchange”
In cases where a homeowner has genuinely tried everything they can to sell the home or to get back on top of their payments, a lender may agree to a deed in lieu exchange. Often referred to as a “friendly foreclosure” the homeowner agrees to sign the deed over to the lender and the lender agrees to write off any outstanding debt.
Sometimes there are no other options than to walk away from your home. Not literally, I don’t advocate trying to pack up your belongings in the middle of the night and disappear.
Instead, approach your lender and ask if they are willing to participate in a cash for keys deal.
In this situation, the bank will make a single, one-time payment to you in exchange for you leaving the home voluntarily and giving them the keys.
If you find yourself in a situation where your property is worth less than the amount outstanding on the mortgage, don’t panic. The are many alternatives to a short sale for both those who want to stay in their homes and those who want to move on.
Whatever you are thinking of doing, ensure you obtain independent expert advice before going forward with any option.
About The Author
Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.