Homeowners struggling to keep up with mortgage payments might feel like their options are limited and shrinking. Banks and consumers often try to avoid foreclosure when other remedies are available. If you find yourself unable to pay your mortgage, you can consider a short sale, in which you sell the home for less than it is worth, or you can keep your home and rent it out to tenants who cover your mortgage while you recover financially. Each option has benefits and challenges.
Short Sale Benefits
When you want to release your house in a short sale because you can no longer make the mortgage payments, you were unable to modify your loan with your bank and you just want to get out from under the financial burden of your property, getting your lender to agree to a short sale might be your best option. With a short sale, your credit rating will suffer, but not as much as it would had you endured a foreclosure. There are fewer long-term consequences with a short sale, and you will not be stuck with a property that has a lower value than the amount you owe on it. You can move forward without the responsibilities of your upside down home.
Short Sale Challenges
You first have to get your bank to agree to a short sale. To do this, you will need to demonstrate financial hardship and a real need to sell your property rather than keep it. There is no guarantee your lender will agree to the short sale. You will also need to sell the house quickly. Your lender will not allow you to live in the house for free while you wait for it to sell. Also, some lenders will expect you to make up the difference in what you owe them. For example, if you owe the bank $200,000, and the short sale closes for $150,000, the bank can pursue you for the remaining $50,000. Your credit score will also decline.
Renting your home out instead of getting rid of it will allow you to keep your long-term investment. You can charge enough rent to cover your mortgage and then find somewhere less expensive to live. When you are feeling stronger financially, you can move back into the house. If you do not want to live there again, you can sell it when you feel like the market will command an acceptable sales price that pays off your mortgage and gives you some profit. By renting your house out instead of short selling it, you will also continue to build equity and protect your credit.
Having a tenant in your house can be unnerving. They can cause damage to the property, leave it messy, disrupt the neighbors or not pay their rent on time. You will also continue to be responsible for the maintenance and repairs associated with the home. The rental market might also be stagnant, causing you to get less rent for your home than you desired, which would leave you financially strapped and unable to meet your mortgage, insurance and tax obligations on the home. The rent you collect is considered income, so you will need to declare it on your tax returns.
How to Decide
If you want to get out from under the financial burden of your house, and you don't care about the equity or the long-term investment, talk to your lender about a short sale. If you do want to keep your house, but you cannot make the mortgage payments right now, try to rent it out for enough money to pay your mortgage and expenses. Talk to a real estate agent who specializes in short sales if you choose that option, and if you decide to rent out your house, get some good advice on being a landlord from a professional property manager.
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