If you’re falling behind on your mortgage payments and don’t think your situation will improve, selling the property in an effort to pay back your lender may be a viable option.
You can still sell a house if you’re behind on payments. However, there are factors to consider such as foreclosure and the market value. We’ll also cover some alternatives such as the short sale, loan modification, and mortgage forbearance to determine which would be the best course of action.
The Foreclosure Process
The main thing you must understand if you’re selling while behind on payments is the foreclosure process.
If you’re behind on payments, you’re likely to receive a foreclosure notice. This is when you’re so behind on payments, that your lender forces you to vacate the property so that they can try to sell it again.
You’d have until the foreclosure process is complete to sell the house.
The timelines for foreclosure vary depending on the state. It is essential that you know what your local laws are.
Time is key here. If you’re behind on payments and still decide to sell the house, but fail to do so in the allotted time frame of the foreclosure process, you will suffer massive credit damage. And this will make it extremely difficult to apply for mortgages in the future.
How to Sell a House, Even If You’re Behind on Payments
Learn the Fair Market Value of the House
If you’re behind on your payments and want to sell your home before it’s foreclosed, then you must be aware of the Fair Market Value of the property. This is important because you need to know whether your home is worth more or less than your remaining mortgage balance.
If it’s worth more
If your property is worth more than what you owe on your mortgage, then you’re in great shape. Because you can make a nice profit to pay back your lender. You’ll follow the typical route to selling a house:
- Connect with a real estate agent.
- Market the house.
- Accept offers.
- Close the sale.
If it’s worth less
However, if your property is worth less than what you owe on your mortgage, you’ll have to consider the Short Sale.
This is where it gets tricky, because in this scenario, if you sell your home, the profits will not be enough to cover the cost of your mortgage, but it will prevent foreclosure. You’ll have to get the approval of your bank to perform this.
Learn the Short Sale process here, which includes submitting a “hardship letter” explaining why you couldn’t keep up with the payments. You’ll have to provide bank and money transaction documents supporting your claims. Also, most lenders may choose to have your home appraised as well.
Pros and Cons of Short Sales
- Less damage to your credit report than a foreclosure
- You can stay in your home until the sale is completed, rather than being forced out through foreclosure.
- You won’t have to pay real estate agent commissions or closing costs. The banks will take care of it.
- You have to submit paperwork and get bank approval
- It won’t be enough to cover the mortgage, but enough to avoid foreclosure.
- You will still be responsible for the costs of repairs, transfers, and fees associated with the house.
Always check with your real estate agent and use online resources to determine the best course of action.
Now, let’s talk about some alternatives.
If you’re falling behind on payments, but want to stay in your home, try these alternatives.
Let’s say you’re not satisfied with selling your home, settling for the short sale, and want to avoid foreclosure, there are still some strategies you can try.
A loan modification is an agreement between a lender and a borrower to change any combination of three things:
- A reduced interest rate
- Longer period to repay
- A different type of loan
You can learn the details of a Loan Modification here.
A mortgage forbearance is an agreement made between a borrower and lender to postpone or reduce mortgage payments for a particular period of time, usually for a few months.
Not to be confused with the intentions of a Loan Modification, a Mortgage Forbearance is best suited for those with temporary financial issues. It is not a long-term solution.
Since the pandemic, legislation has passed that provides assistance to homeowners experiencing financial setbacks involving forbearing their mortgages.
Learn more about this strategy here.
Fortunately, there are strategies that you can use to get back on your feet if you’re falling behind. Research these techniques further and you may find yourself not only catching up and saving but perhaps making a profit as well.