Can You Save Your Equity in a Short Sale?

Published on Nov 08, 2013 06:00 am

Can You Save Your Equity in a Short Sale?In a short sale, your lender allows you to sell your home for less than you owe on the mortgage, and it accepts the sale price as a mortgage payoff. For people in a dire financial situation, a short sale can offer a way out. But if you have equity in your home, a short sale is not an option.

Home EquityEquity is simply the difference between the value of your home and what you still owe on it. Say you have a home with a market value of $250,000, and your mortgage has a remaining balance of $150,000. Your equity in the home is $100,000. Your equity increases as you pay down the mortgage. Equity also increases when your home’s value rises. But if the value of your home falls, so will your equity. When property values are falling, homeowners can end up owing more than their homes are worth. That’s called negative equity, or being “under water” on a mortgage.

Short SalesShort sales become viable when homeowners in a negative equity situation can’t afford their mortgage payments. They can’t get out from under the debt because they can’t sell the house for enough money to pay off the mortgage. In such situations, the lender may foreclose on the mortgage, but foreclosure can be an expensive, lengthy process. To save time and money, the lender may allow a short sale. In this type of sale, an owner sells the house for less than what’s owed on the mortgage, gives the money to the lender, and the lender frees the homeowner from the mortgage obligation.

No Equity to SaveHomeowners can’t protect or save their equity with a short sale because there’s no equity to protect. No lender will allow a short sale unless the owner has negativity equity. When homeowners aren’t under water — when they have equity in the home — then they can simply sell the home for enough to pay off the mortgage. Lenders view short sales as a last resort and they typically won’t approve one (and short sales always require lender approval) unless the homeowner has already fallen behind on the mortgage.

Lasting EffectsA short sale damages your credit, since it goes on your credit report as a debt that wasn’t fully paid, and the impact on your credit score can likely be as severe as a foreclosure. And according to the National Association of Realtors, a short sale on a credit report can keep you from getting a new loan for two years, while a foreclosure may prevent it for up to seven years.

This article is provided for general guidance and information. It is not intended as, nor should it be construed to be, legal, financial or other professional advice. Please consult with your attorney or financial advisor to discuss any legal or financial issues involved with credit decisions.

Published by permission from, Inc.  © 2013, Inc.  All rights reserved.

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