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I’d rank my first home purchase, when I was in my mid-20s and far less financially savvy than I am now, as my biggest money mistake. I got a mortgage loan to buy that house for the wrong reasons (namely, I was sick of living in my apartment) and with absolutely no cash reserves of any kind. In short, I could not afford a house.
It was a bone-headed thing to do, and I ended up in a world of hurt when my life changed drastically in the space of six short weeks just two years after buying it. After getting laid off from my job and leaving my now ex-spouse, I went further and further into the hole on my house payments for more than three years, until I finally dug myself out with a short sale. Here’s how the process works for you, as the soon-to-be-former homeowner.
Why would you need a short sale?
You might opt for a short sale if you can no longer afford your home (this was the case for me) or are underwater on your mortgage and need to move. Being underwater means you owe more on the home than it’s worth, and this might not be such a big deal if you are intending to keep living there.
In such an instance, your mortgage lender gets the final say over whether the short sale can happen. You would likely need to communicate in writing why the short sale is a good idea, and perhaps share why you can no longer afford your payments. The lender will have to agree to sell the home for less than you owe and take a loss on it, if it agrees to forgive the debt you’d still owe.
A short sale is a lot of hassle for a lender too, because it will have to oversee the sale by way of hiring a real estate agent. Short sales can be complicated; the National Association of Realtors noted that many of its members have limited experience with them, so if your lender recommends a certain agent, it’s likely best to go with the recommendation if they are interested in handling it. This isn’t to say you won’t be dealing with an agent, because you will.
You have to make your home appealing to buyers
Even if your lender is managing the sale of the home in partnership with a real estate agent, you should still be invested in making your home look its best to sell, as you can continue to live there during the process. I wasn’t even in the same state as my house during my short sale, but I still had to pay for the landscaping that was needed for curb appeal; that was several hundred dollars I could not afford then, but it’s a really important move to sell a home. (At this point, I wondered if that house would ever stop ruining my life.)
You’ll have to move — but you might get a seller incentive
When your home sells, you’ll have to move out, but you can generally live in it during the sales process (bearing in mind that it’s in your best interest to keep the home looking nice so it sells quickly and you can get on with your life).
You might get a seller incentive when the home is sold and the sale is complete. This will depend on the circumstances of your home loan and the particulars of your lender. I got an incentive check when I went through my short sale, but that was several years ago. And then I was able to qualify for a tax break on my incentive, which was a big help.
Your credit takes a hit
When all is said and done, you’ll end up with damage to your credit score. How much will depend on how many payments you missed before starting the short sale process. Regardless of whether you manage to get out from under your mortgage before you miss payments, the account will still show as “settled,” or “account legally paid in full for less than the full balance,” according to credit bureau Experian. And this does hurt your credit score (though less than a foreclosure, which has a very negative impact on it). But you won’t have the impact of missed payments on top of that.
Short sales don’t last forever on your credit. My FICO® Score rebounded to “good” (670-739) within a few years, and has only gotten better, taking me to the “exceptional” range (800-850) since I got my finances in order in 2022.
If I can go through this and come out on the other side, so can you. So if a short sale is in your future, or you’re struggling to make your mortgage payments and looking for a way out, you might consider this option, which is better than a foreclosure.
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