Shortsale House that's Upside Down

9 Replies

Is it possible to short sell a house where the owners are current on their mortgage but the house is worth less than what is owed?

Would lease/option and subject to be the only strategies available for a property such as this?

Thanks

A short sale while current is an option but guidelines vary by lender. Oftentimes, if a homeowner is current on their payments, they must show imminent default. 

If their only “hardship” is being upside down and wanting to sell, they could likely be asked to contribute to the loss by signing a promissory note or paying a cash contribution at closing.

Have them talk to their servicer and ask if their investor allows a short sale while they are current and get the conversation going. But they should be prepared that if they show affordability, they could be asked to contribute.

@Kelvin Letron Brantley
Banks are not as lenient today with short sales and most likely would go back after the borrowers for a deficiency judgement.
This would most likely only occur if they were 90+ days behind and were ready to ruin their credit.

Not recommended - they would be better off renting it out if they had to move. If this was just to avoid the negative equity besides the morality issues with it I do not think it would end up well for the borrower

Depends on investor or potential insurer guidelines and if imminent default or an appropriate hardship qualifies them to be approved while current. They could be denied for affordability. Depending on finances and borrowers goals a short sale may still be possible. Depending on the amount owed and what the home is worth it may only make sense for a short sale to put the property in an equitable position. IMO it doesn't make sense to buy homes that are underwater unless if there is a very good reason.

Some states do not allow deficiencies or borrower contributions so, I would make sure your state is on one side of the fence or the other when doing your due diligence. Some types of borrowers do not need to "qualify" for any guidelines on short sales (Active duty military with PCS orders for example) so, again, I'd do the research.

If you are (your friend?) a "normal" borrower that just doesn't want the emotional baggage of having a home with more owed than what's its worth, um, I guess you could ask the lender for a short sale package and just see what they say. If you are current and it cash flows without too much of a strain on the budget, why ruin your credit? If it doesn't cash flow, or if you are just fed up with being a landlord, well, I guess you could just go delinquent and then you won't have to worry about them considering you for a short sale while current? That eliminates one issue. Creates a bunch of other issues but...

@Alexis Adams , @Gabe Amedee, @Chris Seveney , @Brett Goldsmith , @Ron S. ,

Thank you for your replies!  It sounds like the overall theme here is to stay away from short sales.  I was just looking to see if it might be a viable option, but what I'm most likely going to go with is lease option or wrap around mortgage subject to existing financing.  Thanks again!

Originally posted by @Kelvin Letron Brantley :

@Alexis Adams , @Gabe Amedee, @Chris Seveney , @Brett Goldsmith , @Ron S.,

Thank you for your replies!  It sounds like the overall theme here is to stay away from short sales.  I was just looking to see if it might be a viable option, but what I'm most likely going to go with is lease option or wrap around mortgage subject to existing financing.  Thanks again!

 I'm probably the dissenter among the forum on that as I'm a lender so, my two cents would be counter to most. I'd stay away from the subject too or wrap around (no problem with lease options) programs as we lenders wait for you to screw up (you, buyer, seller, someone) and call the note due when we find out you did it.

I'd say greater than 90% of people get away with wraparounds and subject to. 90% of people get away with cheating on their taxes too but do you want to be the one that doesn't get away with it?