I feel so guilty and ashamed for putting myself in this position. How did I allow this to happen to me?
If you learn only one thing from visiting us we hope it’s that you allow yourself to be free of guilt and shame over your circumstances. We are in the midst of the greatest economic downturn in our history as a nation. You are not personally responsible for our economy nor do we think you are personally responsible for dropping property values.
The only thing you are really guilty of is bad timing. You probably purchased or refinanced your property in the last five or six years.
If ever there was truth to the notion that there is safety in numbers, you can feel safe in the knowledge that millions of homeowners share your pain and your circumstances. We do not wish to make light of the problem but let’s recognize it for what it truly is. This is “where” you are in life and not “who” you are in life.
Should I stop paying my mortgage in order to complete a short sale? Is it required?
Oversimplified, the short answer is….unfortunately, yes. In reality, this very difficult choice is personal and must only be made after careful consideration of all the benefits and consequences. First we’d like to address the personal and emotional challenges of this issue.
We often feel compelled to continue making mortgage payments even when we can’t afford to continue any longer. Pride, commitment, honor, duty and obligation are all very deeply rooted core beliefs (and rightfully so) that interfere with our ability to make objective choices which might be best for our personal well being and that of our family.
Our sense of duty and obligation is so strong that many of us will borrow from credit cards, draw from savings or retirement accounts (don’t ever do that) or borrow money from family and friends in order to make the mortgage payment. We don’t realize that digging the hole deeper will not help us get out of our hole. The first rule of recovery when digging a hole is to stop digging!
When you are deeply upside down in property value (meaning your home is worth less than you owe), you must realize how long it will take for your property value to return to its pre-recession levels. If you have lost more than 25% in value, it’s not likely that your home will return to its prior value in our generation. Think about that. It could take an entire generation for values to restore themselves above the amount that you owe on the property.
That means that you can’t out save this economic downturn. You can’t out live it. You can’t out last it. Every dollar you spend on your mortgage, when significantly upside down, is a dollar that will not be returned. That same dollar will not provide value to you and cannot be spent on your family. If you are upside down in value, you are effectively renting your home.
So when choosing whether to continue making mortgage payments you have to first decide what value you receive in return, if any?
As a practical matter, we intellectually rationalize that it’s important to continue paying the mortgage in order to preserve our credit (which is a false belief). Please refer to credit consequences of a short sale for more information.
In addition, it is virtually impossible to get your bank/lien holder to approve a short sale request if you are still current on your payments. Not totally impossible, just virtually impossible. From their perspective, non-payment is a default. Why would they help you to default on their mortgage? They wouldn’t.
Banks/lien holders are very conscious of our private guilt and our need to honorably fulfill our commitments. They would prefer that we listen to our inner conscience and not default even if it’s not in our personal best interest, or that of our family.
What will happen to my credit if I short sell my home?
It will be damaged. That’s the unfortunate truth. But keep in perspective what it means to have damaged credit and its practical effect on your day to day life. Credit has value only when borrowing money or when being used as a variable in determining eligibility for certain jobs/employment opportunities (or security clearances).
If your job/employment is not dependant on your credit, a short sale will have no impact. If you don’t expect, or need to, borrow money in the next 24 +/- months, a short sale will have little to no impact in your daily life.
Credit will self repair if you return to paying creditors on-time and as agreed. The unfortunate, yet minimal, risk of having damaged credit is one of the unintended consequences of a short sale. The only way to avoid damaged credit is to continue paying your mortgage as agreed and until maturity. For most of us, that is not a possibility. It’s often not a matter of whether or not we will default but when we have to default.
Since it takes a minimum of 24 months to return our credit to pre-default levels, the longer we delay the decision to default the longer it will take to return to “good credit” status.
If I stop paying my mortgage, should I stop paying my homeowner or condo dues?
No. We recommend that homeowners continue to pay their HOA or condo dues even when in default on their mortgage. This assumes that the homeowner can financially afford the payment and it’s a choice, not a struggle.
Nonpayment affects your neighbors. Homeowner and condo associations run on a strict and limited budget. When they don’t receive payments, it has a direct and immediate impact on their bottom line and trickles down to your neighbors. It can affect property values, benefits and services and quality of life for neighbors.
In addition, many associations are now fighting back and seeking personal judgments against the homeowners for non-payment.
If the homeowner can no longer afford the payment, that becomes the most important consideration and they should not pay. A homeowner should not worsen their already tenuous financial position just to make the payment for HOA or condo dues. But, if they have a choice, we ask them to choose to pay the dues.
I have a security clearance (or I have a job that is dependent on my maintaining good credit). I can’t afford my home but I can’t stop making my mortgage payments because I don’t want to risk losing my security clearance or my job. What can I do?
It is highly unlikely that you will lose your security clearance or employment because of a short sale. We want you to truly understand your circumstances so that you can approach your direct supervisor or human resources department for help and for approval to complete a short sale while stopping your mortgage payments.
It’s such a common phenomenon that most HR departments, even at the highest level of government, have a standing policy for dealing with short sales.
There are many factors that were considered to determine your eligibility for obtaining, or retaining, a security clearance or specialized employment. Credit is only one of the factors used. Let’s understand why credit might be a factor for consideration in such matters.
Employers will want to review a credit report, not a credit score. A credit report is a combination of your credit score and your credit history. Your credit history tells a story of how you have used your credit in your lifetime. Have you exercised good judgment and decision making in your personal use and management of credit? You probably have.
A historical review of credit also helps employers determine if you are vulnerable to influence from third party sources (such as bribery and extortion) because of poor financial judgment. Are you vulnerable to bribery or extortion? You might be if you don’t get rid of your upside down mortgage.
Remember that even if your credit score drops, your credit history will remain intact but it will now include a negative event that you didn’t cause.
Most personnel and human resource departments realize the short sales are an everyday part of our life in this economy. They know that you didn’t cause your circumstances and that by getting rid of the mortgage debt that acts like a financial anchor around your neck, you are exercising good financial judgment and decision making.
Also, we don’t know if this describes you but most people face the prospect of a short sale because they don’t have a choice. They are unable to continue paying their mortgage long term. They need to sell but they owe more than the home is worth and don’t have the financial resources to pay the deficiency. Regardless of whether their supervisors deem it permissible or not, they will do a short sale….which will affect their credit score even if they didn’t stop paying their mortgage. But failure to stop paying their mortgage will likely disqualify them from being approved for a short sale. It’s a Catch 22.
Please don’t take our word for it. This is such a critical and sensitive issue but you also don’t have to guess, wonder or worry. The answer can easily be determined by simply asking the question.
Approach your supervisor or personnel department (immediately) to share the reality of your circumstances and ask for guidance. You will likely learn that you weren’t the first to ask (and won’t be the last). They will likely assure you that a short sale will not jeopardize your security clearance or continued employment. It’s that simple.
If it turns out that we’re wrong, and the supervisor refuses to consider allowing you to do a short sale, what are you going to do? You can’t keep making your payments. Maybe you can in the short term but you can’t do it forever. We haven’t encountered any employer that would act, or react, so harshly given the unique circumstances.