Deciding Between a Short Sale and Refinancing Your Mortgage

If you are struggling to stay current on your mortgage, it may be possible to engage in a short sale or refinance your existing loan. A short sale allows you to walk away from the home without paying the loan balance in full while refinancing your loan allows you to alter its terms while retaining the property.

What to Know About Short Sales

You must generally obtain permission from your lender to engage in a short sale, and the lender will typically need to approve a purchase offer before the sale can be completed. Typically, your mortgage servicer will need to see evidence that you cannot meet your current obligation before agreeing to let you put the home on the market. In many cases, a job loss, loss of income or an unexpected increase in expenses are deemed sufficient reasons to let you sell your house for less than it is worth.

What to Know About Refinancing Your Mortgage

When you refinance your mortgage, you essentially rip up your current loan agreement and replace it with a new one. In some cases, you may be required to pay closing costs, have your home inspected or complete other tasks as part of the refinancing process. However, renegotiating the terms of your home loan may allow you to lower your interest rate or allow you to stretch payments over a longer period of time. This may allow you to reduce your monthly payment and make it easier to stay current on the loan. 

Short Sales Are Best for Those With Negative Equity

If you have positive equity in your home, you can just sell it and use the proceeds to pay off your mortgage in full. Therefore, a short sale is typically only an option if you owe more to your lender than the property is worth. It is important to note that going through with a short sale could significantly reduce your credit score. However, short sales are typically better than foreclosures because it won't jeopardize your ability to purchase real estate in the future. 

Ideally, you won't spend more than 33% of your monthly income on a housing payment. This may prevent you from becoming house poor or otherwise struggling to pay your bills each month. If you have reason to believe that you won't be able to make a mortgage payment on time, don't hesitate to contact your lender right away.


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