Selling your house to avoid foreclosure might be the best way to prevent long-term dings to credit scores. The sooner you can get out of the mortgage and move on, the faster you can rebuild your financial life
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Wondering if you can sell your house to avoid foreclosure? This is a common question for many facing financial hardships. Foreclosure is the process of the lender taking the property over based on your failure to pay mortgage payments. When you applied for the mortgage and signed all the final paperwork, you gave the lender the authority to do this if you went into default on the loan terms. The goal for the bank is to recoup losses and prevent more. If foreclosure is imminent for you, it is absolutely legal to sell the home before the bank enters into the foreclosure process. While you may not get the amount you hope to in the sale, it prevents the house being taken from you and getting a big ding on your credit that lasts for seven years. Even if the bank starts the foreclosure process formally, you still have the right to sell the property. However, if you sell it for less than you owe the lender, you will still be liable and could be sued by the bank for the difference.
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The Short Sale
A short sale is a type of real estate transaction where the property is sold with all proceeds going directly to the lender. The short sale refers to selling the house short of the actual remaining loan balance. The lender must approve any short-sale. Assume you bought your home for $200,000. Tough times hit and you lost your job and the real estate market took a dive at the same time. You still owe $160,000 on the house that is only worth $150,000 right now. Not only are you unable to pay the mortgage because of unemployment, selling the house won't even make-up the difference of what you owe the bank. The bank can approve a short sale for $150,000, though some situations still require you to pay the difference of $10,000. Each situation is different.
The bottom line is to liquidate the house. Even if you are still holding a $10,000 judgment against you from the bank, that is much more manageable than a $160,000 loan you cannot pay.
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Before the Short Sale
The foreclosure process doesn't happen overnight. You will first be late or miss at least one payment. The bank sends notices of the missing payments and then attempts to find a solution with the customer -- generally demanding payment for all missing payments. In situations where the housing market is taking a substantial hit and many customers are having financial difficulties, the bank might be open to renegotiating the loan. However, if it isn't, you might want to put the house up for sale as soon as possible. If you can liquidate it quickly, you might prevent significant derogatory credit hits. If you are lucky, you might be able to get a little more than the mortgage balance, though the primary goal should be to get out from under a huge financial burden before its too late. If the formal foreclosure process has not yet started, you can sell your house with final bank approval. The bank always has final approval with the lien on the property from the mortgage.