If you are facing a foreclosure in Alabama, one option to avoid a foreclosure is to do a “short sale” which is where you sell your home for less than what you owe the mortgage company.
Why is it called a short sale?
Because you are looking to sell your house for less than what you owe.
Let’s say that you owe $300,000 on your home.
If you sell it for $300,000 or more, than this is simply a normal sale of a house.
You do not need any approval from your mortgage company to do this because your mortgage company is going to be paid off when you close on the loan.
But let’s say that you can only sell your house for $250,000. This means that you are $50,000 “short” of what you actually owe.
If your mortgage company approves of this, then you can sell your house even though it is a “short sale.”
Why would my mortgage company agree to a short sale?
There are several reasons why.
First, it may be as much money or more money than if there is a foreclosure sale on your house.
Second, the mortgage company does not have to spend any money going through the process of foreclosure, which includes hiring a law firm and potentially having to file suit after the foreclosure to remove the person from the home (an “ejectment suit”).
Third, depending on the type of loan and any agreements with insurance and governmental type agencies, the mortgage company may not take a loss at all even though it is a short sale.
What are the advantages of a short sale?
One advantage is that you do not have a foreclosure on your record. There’s nothing at the courthouse that says your home was foreclosed because it actually was not foreclosed. You sold your home. It was not foreclosed.
A second advantage is that your credit report may not show anything about a foreclosure.
The third advantage is you do not have your house listed in the newspaper as going through a foreclosure sale. You also do not have signs in your yard or in the windows of your house announcing to your neighbors that your home has been foreclosed.
A fourth advantage is that it is possible that you will not owe any money to the mortgage company for the amount that you are short. So in our example above you are short $50,000 but if your agreement says you do not owe this, then that is a tremendous advantage.
What are the disadvantages of a short sale?
One disadvantage is that the mortgage company may put a lot of negative activity on your credit report, including that foreclosure proceedings were begun. It is important to make sure in your agreement with the mortgage company that it is very clear what they can and cannot do on your credit reporting.
The second disadvantage is that you may owe money to your mortgage company. That amount is the amount that you are “short” of the amount owed. Taking our example from above where you owe $300,000 but you sell your home for $250,000, you may owe the mortgage company $50,000. It all depends on what you and the mortgage company agreed to in the short sale agreement as to whether or not you will actually owe any money at the end of the day.
What do I need to do before I can do a short sale?
Typically, you must have your house listed with a licensed real estate broker. And it must be listed for a certain period of time at a price that would actually pay off your mortgage.
Then if this does not work, you and your mortgage company can agree to list it for a price less than what you owe.
It can be difficult dealing with your mortgage company and trying to accomplish a short sale, but the new RESPA rules that went into effect on January 10, 2014, do give you more rights and strictly limit the mortgage company’s ability to lie and play games with you. Well, perhaps I should say mortgage companies still lie and play games, but when they do this, you now can sue where it was difficult to sue in Alabama when mortgage companies would lie about doing a short sale. Thankfully that has now changed….
What if I have questions about doing a short sale or doing something else to stop a foreclosure in Alabama?
First, you are taking the most critical step which is to gain more information about this process so you can educate yourself. If you do not know what your rights are, then it is impossible for you to know what decision to make. You can read more about foreclosures on our Alabama Consumer website.
Second, foreclosures and short sales tend to be very complicated and involve the intersection of Alabama property law as well as federal consumer protection laws. These laws include RESPA, the Fair Debt Collection Practices Act (FDCPA), as well as other laws. It makes sense to sit down with a knowledgeable Alabama foreclosure defense lawyer to fully understand your options and answers to questions such as these.
Is a foreclosure imminent?
Can you do a short sale?
Can you get a loan modification instead?
Has your mortgage company violated federal or state law which would give you the ability to sue your mortgage company? And if you have the ability to sue, does it make sense to do so?
Third, if you would like to talk with us or receive information from us, you can always call us at 205–879–2447 or you can contact us through our AlabamaConsumer website and we will be happy to sit down and talk with you in person or by phone or by video chat.
We wish you the best of success in dealing with your home.