What Can I Do To Avoid a Short Sale?

When negative equity results and current mortgage rates are high, homeowners may have no option but to conduct short sales of their properties. In real estate, a short sale refers to the sale of a property for less than the balance of the loan on the property. Not surprisingly, short sales can be difficult to negotiate with lending institutions. Even when the lender is amenable to the sale and a buyer can be found, the short-sale process involves a lot of time, paperwork, and finessing among lenders, investors, and possibly even insurers.

So what can be done from the beginning to avoid the prospect of an unpleasant short sale? Before taking out a first mortgage or considering mortgage refinance options (if a mortgage already exists), homeowners should take the following precautions:

1. Purchase only as much house as can be afforded, or wait until finances improve. There are a number of free mortgage and refinancing calculators available online that can help buyers determine, with accuracy, the feasibility of a mortgage payment given their current financial health. Failure to perform this basic due diligence could lead to a short-sale disaster down the road.

2. Avoid private mortgage insurance (PMI) by making a large down payment. PMI is costly. Even a low monthly PMI fee could result in thousands of dollars in increased mortgage costs each year. By making a large enough down payment to circumvent PMI (and taking out a mortgage that’s as small as possible), homeowners can keep their balances low. The lower the mortgage, the better.

3. Don’t cash out for more funds than necessary. When a home begins to build equity, it’s tempting to do a cash-out refinance for large expenditures, but a little prudence upfront will pay dividends if the market reverses in the future.

Try to buy a property in a neighborhood whose average home value is appreciating. Of course certain economic factors are out of homeowners’ control; however, buying a home in a neighborhood whose value is depreciating just because it may appreciate at a later date is rarely a wise strategy.

With sound financial planning, homeowners can avoid the dreaded short sale and keep their mortgages right side up.