Can I Try to Sell My House to Avoid Foreclosure?

Foreclosure is damaging to credit scores and dignity. A foreclosure happens because of delinquent payments and failed attempts by the bank and homeowner to negotiate a loan modification. Selling a home to avoid foreclosure is an option to homeowners, but must happen in a timely manner or the lender may start foreclosure proceedings. Unfortunately, once the bank starts the process, finding a buyer is no longer an option. Most people think they have time to sell, but the truth is the bank will send a notice to accelerate letter after the third missed payment. After the fourth missed payment, the lender's attorney will schedule a sale and the home is officially in foreclosure.

Benefits of Selling a Home

• Selling the home before a foreclosure can help avoid a 140-point credit rating decrease. Selling the home also frees the homeowner from an overwhelming monthly payment. Without the damaging credit report, a homeowner can rent or even purchase another home easier than after a foreclosure. If the home has not lost value, the homeowner might make a profit from of the sale. Unlike a foreclosure, the homeowner controls the terms of the sale and can schedule a beneficial time to exit the property. In a foreclosure, the bank sells the home, usually below market value, and has the option to charge the homeowner for any shortfall. This does not occur if the homeowner sells the home, unless the home sells as a short sale. In the case of a short sale, the bank has the option of charging the homeowner for the shortfall.

Short Sales

• Selling a home for less than the amount owed on the mortgage creates a short sale. Increases in numbers of short sales have occurred since the housing bubble burst. Buyers opt for short sales as a way to avoid the credit damage of a foreclosure. Lenders are more likely to approve a short sale today than they were in the past. This is because of the increasing number of homes falling into foreclosure. Lenders are not happy about adding more foreclosed homes to their inventories. They often will work with homeowners in a short-sale situation. Short sales take anywhere from two weeks to three months to complete. It is best to work with a real estate agent familiar with short sales to avoid having the home fall into foreclosure during the process.

Short Sale Process

• The first step in a short sale is contacting the lender for approval. Having a buyer may help the process, but every lender's process is different. All lenders require the completion of a short-sale package. The package consists of a hardship letter, copies of pay stubs, tax returns and bank statements. The lender may request other financial documentation. The lender orders a broker price option for assessing the market value of the home before approving the sale. The homeowner must complete the packet in full, as delays will cause the process to drag on.

Foreclosures

• In the event of a foreclosure, the home goes on sale and the lender places a notice on the door regarding the public sale. The timing of the foreclosure depends on the lender's backlog. The process is stressful for homeowners, and many take these frustrations out on the property. A foreclosure stays on a credit report for seven years. It is important to note that the impact diminishes over time, especially if the homeowner keeps up to date with payments on other credit accounts.

Help With Home Sales

• Working with a real estate agent with experience in both short sales and distressed sales is highly recommended. An experienced agent works with the lender and stays focused on deadlines to prevent the home from falling into foreclosure. If a lender refuses the short sale option, the U.S. Department of Housing and Urban Development has a hot line to assist homeowners; the number is 800-569-4287. Homeowners also can contact HOPE NOW at 888-995-4673 for help in dealing with lenders. There are guidelines lenders must follow regarding FHA-Insured loans, and homeowners can contact FHA's National Security Center at 877-622-8525 if experiencing difficulty negotiating with a lender. Short sales can be cumbersome. Make copies of all paperwork and follow the lender's guidelines completely to avoid delays.