— Is It Too Early to Short Sell?
No. If you're already having trouble with your mortgage, you don't necessarily need to wait for a Notice of Default before investigating whether a short sale is an option.
In fact, this can be a very good time to start asking questions.
Maybe you've missed one payment.
Maybe you're several payments behind.
Your mortgage servicer has started calling and sending letters, but you haven't received a formal Notice of Default.
You may be wondering whether it's too early to do anything.
It isn't.
A Notice of Default is not an invitation to start planning. It's a sign that the situation has already progressed.
If you know you cannot afford the mortgage and believe selling may eventually be necessary, I'd rather start figuring out your options before the foreclosure clock becomes the loudest thing in the room.
What Is a Notice of Default?
In California, a Notice of Default is a formal step in the nonjudicial foreclosure process.
But missing a mortgage payment and receiving a Notice of Default are not the same event.
There is a period between becoming delinquent and the formal foreclosure process moving forward.
During that time, your mortgage servicer may contact you regarding the delinquency and possible loss-mitigation options.
That time can be valuable.
Use it.
How Far Behind Can I Be Without Receiving a Notice of Default?
There isn't a simple answer based only on the number of missed payments.
Federal mortgage-servicing rules generally prohibit a servicer from making the first notice or filing required to begin foreclosure until a borrower is more than 120 days delinquent, although exceptions can apply.
California also has requirements that generally must be satisfied before a mortgage servicer records a Notice of Default.
The important thing for a homeowner is not to calculate the exact day the Notice of Default might arrive and then wait for it.
If you already know you're having trouble, start looking at your options now.
Can I Explore a Short Sale Before a Notice of Default?
Yes, potentially.
A short sale is a type of loss mitigation in which the mortgage lender or servicer agrees to allow the property to be sold even though the proceeds are less than the amount owed on the mortgage.
Whether you qualify depends on the loan, servicer, investor requirements and your circumstances.
But you don't need a recorded Notice of Default simply to begin determining whether a short sale may be appropriate.
There are actually several things we can investigate before foreclosure progresses.
First, Do You Really Need a Short Sale?
Before worrying about short-sale approval, let's determine whether you're actually short.
A homeowner can be behind on mortgage payments and still have substantial equity.
Those are two completely different issues.
Being delinquent means you haven't made the required mortgage payments.
Being underwater means the property may not produce enough money when sold to satisfy the obligations against it and the costs associated with the transaction.
You can be delinquent and have equity.
You can be current and have little or no equity.
So let's start with the house.
What is it realistically worth?
Then let's look at what you actually owe.
What If I Have Enough Equity?
If the home can sell for enough to pay the mortgage, other liens and selling expenses, you may not need a short sale at all.
You may be able to sell traditionally.
And if you already know the mortgage is no longer affordable, selling before the delinquency becomes more serious may give you considerably more control over the process.
You can market the property properly.
You can evaluate offers without an immediate foreclosure deadline hanging over the transaction.
And you can make plans for where you're going next.
That's why I don't want to assume every homeowner who is behind needs a short sale.
First we do the math.
What If I Owe More Than the Property Can Sell For?
Now we're having a different conversation.
If the expected proceeds aren't enough to satisfy the mortgage and other necessary obligations, a traditional sale may not work.
That's when a short sale may need to be explored.
The mortgage servicer will have to approve the transaction under the requirements applicable to your loan.
That process takes time.
And that's exactly why waiting for the foreclosure process to become more advanced doesn't necessarily help you.
Do I Have to Be a Certain Number of Payments Behind to Short Sell?
Don't intentionally miss additional mortgage payments because you believe you need to reach some magic number before asking about a short sale.
Eligibility can vary according to the mortgage, investor, servicer and circumstances.
Your mortgage servicer is the appropriate source for information about the loss-mitigation programs available for your particular loan.
If you know the mortgage is becoming unaffordable, contact the servicer and explain your situation.
At the same time, we can evaluate the real estate side.
There's no reason we can't find out what your property is worth while you're also learning what mortgage options may be available.
What If I’m Trying to Get a Loan Modification?
That's another reason not to think of this as an either/or decision too early.
You may be pursuing a loan modification because your first choice is to keep the property.
That's perfectly reasonable.
But while that process is underway, you can still learn what the property is worth and what a sale would look like if the modification doesn't work.
Getting information about selling doesn't commit you to selling.
It gives you a Plan B.
And when you're dealing with mortgage problems, having a Plan B is rarely a bad idea.
Why Starting Early Can Help
Short sales aren't ordinary transactions.
There can be additional documentation.
The property needs to be marketed.
We need a buyer.
An offer needs to be submitted.
The mortgage servicer may need financial or hardship information.
The servicer will evaluate the proposed transaction and property value.
There may be additional liens that need to be addressed.
All of that takes time.
I'd rather have more time than less.
Waiting until a foreclosure sale is approaching doesn't make a short sale more legitimate.
It simply makes everything more urgent.
What Should I Do Before a Notice of Default Arrives?
Start gathering information.
Pull together your latest mortgage statement and any recent correspondence from your servicer.
Find out:
How far behind are you?
What is the total amount owed?
Have you received any loss-mitigation information?
Are there other loans, partial claims or liens against the property?
What is the property realistically worth?
Those answers help us determine whether we're dealing with a temporary mortgage problem, a traditional home sale or a potential short sale.
What If a Notice of Default Arrives While I’m Exploring My Options?
Don't ignore it.
A Notice of Default changes the urgency of the situation because the foreclosure process has moved forward.
Read the notice carefully and pay attention to all dates.
Continue communicating with your mortgage servicer.
If you need advice about your legal rights or foreclosure deadlines, speak with an appropriate attorney or HUD-approved housing counselor.
And if the property is being marketed for a short sale, make sure everyone involved knows immediately that the Notice of Default has been recorded.
Time matters.
Is It Better to Start a Short Sale Before Foreclosure?
If a short sale is ultimately the appropriate solution, having more time generally gives us more room to work.
That doesn't mean you should rush into listing your property simply because you've missed a payment.
It means we should use the period before serious foreclosure deadlines to figure out what makes sense.
Maybe you'll qualify for a mortgage solution that allows you to stay.
Maybe we'll discover that you have enough equity for a normal sale.
Maybe you'll decide you want to keep the house.
Or maybe the numbers will show that a short sale deserves serious consideration.
Any of those answers is useful.
Don't Wait for a Piece of Paper to Tell You There's a Problem
This may be the most important point.
If you already know you cannot afford the mortgage, you don't need a Notice of Default to confirm that there's a problem.
You already know.
The question is what you're going to do about it.
Contact your mortgage servicer and find out what loss-mitigation options may be available.
Then find out what your property is worth and what you owe.
At Midas Realty Group, we work with Southern California homeowners facing mortgage problems and short sales, including homeowners who are behind on their payments but haven't yet received a Notice of Default.
We can help you understand the real estate side of the situation and determine whether you appear to have enough equity for a traditional sale or whether a short sale may need to be explored.
You don't have to wait for foreclosure to start before you start making a plan.
This information is for general educational purposes and is not legal, tax or financial advice. Foreclosure and loss-mitigation situations can involve important deadlines and individual circumstances. Consider consulting an appropriate attorney, HUD-approved housing counselor, tax professional or other qualified adviser when needed.
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