Should I Walk Away - A Case for Short Sales

If you want to sell your house, you won't have enough money from the buyer's proceeds to pay all the closing costs and your mortgage balance. You will either have to bring in money to closing, or ask your lender to take less than owed. That is called a short sale.

The challenge facing millions of homeowners right now is that their mortgage payments are too high, relative to their income.

The daily expenses of life continue to rise, while incomes have stagnated or declined.

At some point, the homeowner has to wonder, would it be better to walk away from this house and find a lower housing payment? Some people are forced to do this involuntarily, when they simply don't have enough money to pay all of their bills due to job loss, illness or other economic hardships.

Millions of homeowners though, are facing a voluntary decision. Should they default on their mortgage? Would it be best for them financially? And, what are the consequences?

What is amazing is that the lenders and financial titans who control our banking system attempt to use moral arguments to influence homeowners to keep paying when it doesn't make rational sense. The CEO of the Mortgage Bankers Association, in an interview with the Wall St Journal, declared that homeowners who voluntarily default should be concerned about the "message" it sends to "their family and their kids and their friends."


In fact, businesses make these kind of go, no-go decisions all the time.

The common term is "cutting your losses." You sell losing businesses, you file bankruptcy, you stop making payments. It is simply a fact of business. Morgan Stanley recently stopped making payments on five San Francisco office buildings that it had purchased during the height of the bubble. The other half of the phrase is "ride your winners." I have seen too many people over the last few years draw down their hard earned retirement nest eggs, in a tragic effort to stay current on their mortgage, when all signs had pointed to the inevitable loss of the home.

If you have been able to put away money diligently over the years, it is important to seriously question whether continuing to send it to your lender makes the most sense.

Some homeowners feel strongly that they should live up to the terms of the contract that they signed. However, the contract contains explicit language on the penalties for nonpayment. That is part of the deal. It wasn't that you wouldn't default, it was that you agreed to the penalties. With that in mind, it is simply a rational decision as to what would be the better course, continuing making the payments, or accepting the penalties.

The two main penalties for default are a hit to your credit score, and a possible deficiency judgment from your lender.

In Washington State, if you have only one loan, most likely you won't have a deficiency judgment. Most foreclosures in Washington go the route of the Trustee Sale, whereby the foreclosing lien holder waives their right to pursue a deficiency judgment. Junior liens can be a little more tricky, but the bottom line is that while junior lenders do not lose their right to pursue a deficiency, there are many lenders who waive their right during the course of a short sale negotiation.

If you are looking to do a strategic default on your mortgage, a short sale will do the most to preserve your credit, rather than a Deed-in-Lieu of Foreclosure, or letting the house go to a trustee sale.

Currently, based on Fannie Mae underwriting guidelines, you will be able to qualify to purchase another home within two years if you successfully complete a pre-foreclosure short sale, vs. five to seven years if you totally walk away and let the house be auctioned off.

Taking into consideration the two main penalties of default, deficiency judgments and credit score impact, you definitely come out ahead by doing a short sale than simply walking away. And, if you still believe there is a moral argument to continuing to do your best by your lender, trying to sell your house and getting them to agree to take less than they are owed is definitely the most pro-active, positive remedy to a difficult situation.

Contact us to get started today!

Debbie Buffelen, Designated Broker, Realtor, Owner, SFR

Article was written by Ross Kilburn