Do You Stop Paying While You Pursue Short-Sale or Modification?

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EDITOR’S NOTE: I usually tell people not to do anything that automatically puts them in a worse position than when they started, so that is usually taken to mean that you should keep paying. The question of strategic default in a short-sale or modification situation is different than the simple strategic default. The simple one is a walk-away proposition, perhaps after staying rent free for months or even years if you put up a fight. The short-sale or modification issue is more complex.

On the one hand you want to show good faith and maintain your credit rating and on the other you want the other side motivated to accept your proposition. Since they are not inclined to accept any settlement without foreclosure (the economics provide that incentive) most people I interviewed are suggesting that stopping payment is the only way to get their attention. The following article is as  good as any in discussing the issue.

Pros and cons of paying mortgage during short sale

REThink Real Estate

By Tara-Nicholle Nelson, Monday, November 28, 2011.

Inman News™

Q: We just got multiple offers on my “vacation” house listed as a short sale. And so far, we have begged and borrowed to keep our mortgage current so our credit scores will be less bruised. But now that our house is in contract, do I continue to pay the mortgage? Our debt exceeds our income due to job and benefit loss.

Here’s my bigger concern: Since we are current, I don’t want the bank to reject the offers just because we have been current, although our financial papers will prove that our debt exceeds our income. –Cindy

A: There are a number of schools of thought and approaches to deciding whether to continue making your mortgage payments while you’re selling your home on a short sale, and your ultimate decision will require you to weigh a number of factors and see where your personal calculus of your own values and interests comes out:

Legal: Legally speaking, you have an obligation to pay your mortgage and property taxes as long as you own your home. While you might very well make the decision not to for a number of reasons (see below), it’s important to keep the legal contract you made to pay especially your mortgage in mind, as some lenders make efforts to reserve the right to come after you later for the deficiency (i.e., the difference between the sale price of your home and your mortgage balance). For this reason, it’s not a bad idea to have a local real estate attorney involved in your short-sale transaction, to help you negotiate a complete release of liability for the mortgage.

Article continues below

The moral/ethical perspective: Morally and ethically, some homeowners view themselves as having an obligation in line with their legal commitment to pay all these items. Others look at the various factors beyond their control that have forced them to short-sale their home, like the decline in property values and the weak employment market, and have made a decision that their personal moral imperative weighs in favor of protecting their family finances and children’s education funds. In that vein, some make the conscious decision to stop paying once they’re in a short-sale situation or on a clear path to foreclosure.

Financial/business: Once you know 100 percent that you’ll be divesting of your home in some way, shape or form, continued investments in the property can seem to easily fall into the “throwing good money after bad” bucket, looking at the situation from a strictly business and financial perspective. There is also a strong sentiment among many real estate professionals that if you keep your mortgage current, while applying for a short sale or loan modification of any sort, you decrease the chances that your lender will approve of the sale.

The theory goes that if you are current on your payments, you can’t possibly have the level of hardship you must claim (and the lender must believe you have) for them to agree to waive the deficiency amount and release you from the mortgage.

I’ve seen very mixed feelings on this in the real estate industry; on this point specifically, you should definitely talk with your listing agent and your local attorney, and take their advice into account — they might have worked with this bank in the past and be able to shed light on how staying current or falling behind may affect the success prospects of your short sale application.

Credit/ability to buy again: Right now, you are probably fixated on getting out from under this onerous debt, as virtually every homeowner in your situation is as a matter of course. But I’ve worked with a number of folks through this entire experience of going upside down, losing a home through a foreclosure or short sale and financial recovery, and I know that before too terribly long, you could very well be looking to buy a home again. Just be aware that most lenders will impose a two- to three-year waiting period after you have a short sale, if you were in default on your mortgage at the time the short sale closed (sometimes the waiting period is as long as seven years, depending on what type of loan you’re trying to use to buy your new home).

However, if you do not default on your loan and are able to get your lender to green-light your short sale, you can qualify for an FHA mortgage immediately. I don’t know your personal situation, and it’s been my experience that the majority of homeowners who have a financial hardship severe enough to even attempt a short sale need a couple of years to get back on their feet, but if you think you’ll want to buy another home anytime sooner than two years from now, you’ll need to stay current on this mortgage.

Just as there are many factors your bank will weigh in determining whether to allow your short sale to close, and on what terms, you have a lot of considerations to weigh in deciding whether to continue making your mortgage payments while you await their decision. I can’t urge you strongly enough to include your real estate agent and an attorney in your decision-making process.

Tara-Nicholle Nelson is author of “The Savvy Woman’s Homebuying Handbook” and “Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions.” Tara is also the Consumer Ambassador and Educator for real estate listings search site Trulia.com. Ask her a real estate question online or visit her website, www.rethinkrealestate.com.

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11 Responses

  1. I find it laughable that the author thinks you should talk with your “listing agent and attorney” in an attempt to get a fair shake from liars and thieves. She’s clearly unaware of the huge financial crime these mega criminals perpetrated on the whole debt-loaded-to-the-point-of-breaking population of the world. When you tally it all up, we have probably paid a realistic price for our homes, IN FULL, three times over. The consideration of your credit score is goofy, when you start to realize that criminals who run these agencies sell you your own information and sell it to every corporate entity that’s willing to pay for it, too. What a racket. They use your credit score to manipulate your behavior, wield it like a blackmailer would, and punish you if they can. I keep saying this over and over; it’s time to JUST STOP PAYING TO SUPPORT THE CRIMINALS! Stop borrowing, stop BUYING and stop paying for all the debt they claim we owe, when we’ve already bailed out the very people who are robbing us blind, so they can’t get their greedy hands on the roof over EVERYBODY’S heads. It’s time to end this racket by ending the Federal Reserve and closing the other banks in the cartel. Why are we allowing this to go on? We need to make congress homeless, so they’ll sit up and listen to the people.

  2. […] See the article here: Do You Stop Paying While You Pursue Short-Sale or Modification? […]

  3. And as usual, Mandelman hits the nail over the head. Literally…

    http://mandelman.ml-implode.com/2011/12/demarco-of-the-fhfa-like-when-the-baby-gets-a-hold-of-a-hammer/

  4. This article is asking the wrong question in my views: we already paid in 2008 and 2009 when we bailed out those many banks, AIG, Fannie and Freddie and not one of them has yet paid.

    As a matter of fact, i was flabergasted to learn that CIT group, owner of American Finco, did receive 3.2 billion in March 2008. It wasn’t enough and, in November/December 2008, it filed for BK. Subsequently, whatever was left of it was sold to some Canadian bank.

    We were never reimbursed for our $3.2 B.. This will be the fate of BofA and other banks. Many of them were seized by FDIC AFTER receiving bailout money.

    How many times do we have to pay the damn house?????/

  5. This article is dumb and founded on the writer’s personal views i think, frankly i believe she’s full of it, i wonder how much she was paid by some “lender/liar” to write it……she doesn’t even mention that in some states there are laws in place that do not allow a “liar/lender” to come after the deficiency…..propaganda……..such lame article….she doesn’t even address the real FRAUDULENT issue behind the so called “mortgage”………she needs to get educated BIG TIME before she writes again…..hopefully she’ll never write on the subject again….

  6. Why would any one jump out of the frying pan into the fire? That is what is being advocated. Going through a foreclosure, or a short sale should make anyone swerve away from being burnt again. We were a saving nation until the insanity
    we are witnessing. Now we are an overwhelming debtor nation. Plus using the same financial system is putting ones’ hand into the very same fire.

  7. Regardless of whether you stop paying while pursuing a mod, you should also be pursuing a quiet tile or similar action against the bank, just like the bank is still pursuing a foreclosure against you during the mod process.
    http://bryllaw.blogspot.com/2011/01/homeowners-response-to-banks-dual-track.html

  8. This article fails to mention, even though you may agree to a short sale, you will have a deficiency. That deficiency may end up in a judgment against the party, hence damaging their credit for years. There is no free lunch. I disagree with this article, as the banks do not play by the rules and most of them do not have proper authority to sell anything. People need to do their homework. In this environment it is very hard to get away unscathed. Forgot to mention the tax consequence from the short sale and it could be significant to the seller.

    Alessandro Machi: the bank did exactly that to me. They would not help unless I was in default. Then the games began. Two years later, lawyers, court, property in limbo, with 100k in upgrades from when they sold it to me. Unbelievable mess. It makes for a tough choice, as I believe the upgrades are mine.

  9. Carie and all

    read this case she got shot down on almost everything

    Scholar Alert: [ forged deeds ]; Federal cases

    Tilley v. AMPRO MORTGAGEDist. Court, ED California, 2011
    … her claim that the chain of title is convoluted, that MERS does not have any authority to act in
    connection with the deed of trust … dismiss, plaintiff particularly relies on the fact that Deborah Brignac
    signed three of the documents in the chain of title and suggests this shows forgery. …

  10. The other Moral and Ethical Reason is also the fact the we could not conscientiously, pay crooks, who have scammed the whole nation, who received their assets via our signatures. The counties benefited from the taxes, the recorders are in heaven, as are the papers. To Morally participate in 12 million homes in foreclosure, let alone all the short sales, and then those that were ready to retire from many years of payments, can’t at best. I think I last heard the number around 14 million since the start of the “financial collapse in 2008”, doing the math of the US population, broke down by avg residential house, I don’t recall Donald Trump bringing any of that into his latest Show about what America is really worth. No, in fact, he says as individuals we have 5-6 digit figures in “per individual profit”, I know I don’t, so someone else has my share, and same with many people I know, I like how all that was added up, now lets see a show how that is actually divided out. Where’s the Ethics in that?

  11. The following is not meant to influence anybody one way or the other.

    It appears to me that any attempt to restructure a debt requires a credit default by the debtor. I find this so outrageous I just don’t understand why more people don’t complain about this one aspect of renegotiating a debt that seems to override all other issues.

    I came up with a plan called Justifiable Debt Restructure in which if a person qualifies for a J.D.R., they can get their interest rate lowered and can extend the time it takes to pay off their debt, as long as they agree to not run up new debt.

    The idea being that there may be millions of americans who cannot get out of debt specifically because of the interest rate charges on their existing debt.

    Ergo, if the interest rate charges are reduced, and the lowering of monthly payments allows the debtor to actually turn the corner and begin to lower their overall debt, the economy WILL improve as what was once rising monthly debt due to the national banks becomes a surplus to be spent on the local economy.

    Here is a link for those interested in J.D.R.

    http://occupynews.blogspot.com/2011/11/justifiable-debt-restructure-would.html

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