The Long Road to a Short Sale
Before you dive too far into this article I want to make sure you’ve come to the right place. A short sale is different from selling your home quickly. The “short” in short sale refers to money (the fact that you are selling your home for an amount that’s short of the debt you owe), not time. This is commonly known as an ‘underwater’ mortgage. The term hit the headlines in the US after the financial and housing crash of 2008.
Letting go of your home can be an emotionally difficult decision to make. It may also be the only way to avoid a looming foreclosure or bankruptcy. If your home is currently worth less than you owe on the property, a short sale may be the answer.
What is a Short Sale?
As mentioned above, a short sale is when your lender agrees to let you sell your home for less than you owe on your mortgage. Let’s say your mortgage balance totals $400,000, but the current market only values your house at $300,000. In a short sale, your lender agrees to let you sell at $300,000—which is $100,000 short of what you owe.
Of course, there’s no guarantee that your lender will to agree to a short sale. And full disclosure: a short sale can take months if not years to conclude. You’ll need to prove to your lender that there is no way that you can continue to pay the bills. Usually you will have to demonstrate that your income is lower than your bills. When the alternative is foreclosure, your lender is more likely to agree to a short sale.
After the short sale is completed, this doesn’t necessarily mean that you’re free from your mortgage. You’ll still have a remaining balance on your loan that your lender can either forgive or attempt to collect.
If the lender agrees to accept the lesser amount as payment in full for your mortgage, they’ll issue you a Cancellation of Debt form freeing you from any obligation to repay the outstanding $100,000. That forgiven debt is reported to Canada Revenue Agency by your lender and may be considered a taxable earning.
If you made a down payment of less than 20% then you may be covered through insurance with Canada Mortgage and Housing Corporation (or Genworth Financial). Both of these companies also have programs to help people struggling with their payments.
If you aren’t covered by CMHC and your lender refuses to forgive your outstanding loan of $100,000 then they may want to talk to you about a repayment plan. Unfortunately this can include registering the debt against any personal property you have (like a vehicle) or even pursuing you in court to garnish wages.
Don’t Give Up Hope!
For homeowners on the hook for a large debt after a short sale, there are options. Since you’ve already made your mortgage company aware of your financial difficulties, they may be open to accepting a settlement offer—such as paying back only $10,000 of the $100,000 you still owe to settle the debt.
Although bankruptcy isn’t a good idea if you just want to eliminate the remaining debt to your lender, it may be a smart alternative if you have other loans and debts that you cannot repay.
Depending upon where you live, you might also wait it out and hope that your lender never tries to collect. In many provinces, lenders have a limited window in which they can file for and attempt to collect on a debt that they know about (known as a limitation period). However, a limitation period only applies if the lender knows about the debt and does nothing (which is unlikely for most financial institutions).
Keep in mind that the best time to negotiate a settlement offer is before you’ve made a short sale. When you first know you’re in trouble talk to your lender as this is the strongest position.
If you missed the boat on negotiating early, your next best step is to speak with your lender and a good REALTOR®. Your lender will likely insist that a real estate agent list the property so you can both maximize its value. Make sure your real estate agent is familiar with short sales as it can be a complicated process with multiple parties.
While a short sale can be a long process, it can be better than the alternatives. As much as it may be difficult to admit you can’t pay the bills, doing so early can really help negotiate a plan with your lender and Realtor. This is one case where you should start early and then leave it to the professionals.