Strategic short sale is when a homeowner does a short sale even though the homeowner is not having financial hardship. This is different from strategic default where the homeowner stops making mortgage payment with the intention of having his/her house foreclosed by the lender.
You may be asking why do I have to go through the hassle of short selling when you can just give back your house to your lender? There are some benefits of doing a strategic short sale rather than strategic default.
- It has less impact in your credit rating than a foreclosure in your record.
- It is possible to buy another house after a year and half or so of your short sale
- Short sale is less embarrassing than foreclosure.
Let’s say you decided to do the strategic short sale, you may be asking, will the lender approve your short sale even if you cannot prove financial hardship?
Nowadays, the answer is more than likely that the lenders may approve it because of the following reasons:
- More and more are doing strategic short sale than before. According to the New York Times about 30% of short sales are strategic. Lots of homeowners bought their home for investment purpose so they were expecting to make a profit later on. These homeowners are less emotionally attached and so it is easier for them to get rid of a house investment that is not making money.
- Lenders realize that their financial lose is much less if they approved a short sale than foreclosure. Approximately they save 45k-50k through short sale over foreclosure. Chase and B of A investors are even offering cash incentives for homeowners to do short sale than go through foreclosure.
- There is no legal ramification to the seller except for their house. In a foreclosure state such as California, the equity of the house is the main security of the lender. The only legal recourse of the Lender is to foreclose and repossess the house of the seller if they do not make their monthly obligation. And because lenders loss a lot more in foreclosure rather than in short sale as mentioned above, the lender allows and approve the strategic short sale of a house.
- At this moment, lenders have a lot of foreclosure in their hands that they would rather accept a strategic short sale than add more foreclosures in their hands.
Even though your lender may more than likely approve strategic short sale, they will still ask for a hardship letter. Hardship depends on someone’s perception though. Hardship (even if you can still afford the mortgage payment) may be due to various factors such as reduction of income, relocation, Illness, divorce, terms and rate adjustments in your loan, death in the family, unexpected expenses, etc. It is also important to hire a good real estate agent or broker specializing in short sale because they have experience writing a good “hardship letter” that will be acceptable to your lender.
One caveat: Lender may more than likely ask you for a cash contribution. They will ask for your bank statement and if they see that you have lots of savings then they may demand for a larger contribution. Most homeowners seem to be okay with this because of the fact that the lender is already discounting the loan payoff for a few cents to a dollar.
If you find these information helpful, you can get a free copy of my ebook entitled “21 things you need to know before you short sale your home” by going to my website www.ShortSaleHomeSpecialist.com or call me at 408-221-2893 for a free consultation.