This is common question asked by our clients here in Texas. In this article, I want to give you some things to think about if your client is asking this question.. In deciding whether you should or should not recommend that your client stop making your mortgage payments, these are things we have learned from experience and face every day with our clients.
To begin, you should never recommend that someone stop making a mortgage payment. Its not ethical and lenders would not be happy. However, you can tell you client what happens if they stop making the payments during a short sale.
What happens when a client stops making the mortgage payment:
When you are trying to do a short sale the bank is looking for a hardship, and this can be a number of things. A hardship can be a job loss, Income reduction, forced relocation, Illness or a divorce. If a client continues to make the mortgage payments the bank is less likely to accept the short sale. A lot of investors are rejecting short sales if the mortgage is current. We have had lenders who will tell us just by looking at the file that our clients do not “qualify” because their loan is current.
A lot of our clients struggle with this fact because they do not want the missed payments to affect their credit. Most likely if they are in the situation of a hardship their credit has already been affected in some way. If they continue to make the payments the bank may assume they can afford the mortgage and will not consider the “hardship”. The bank will not make the file a priority as they are not in “default”. This is a hard concept to understand as you would think the bank would want to continue to receive payments and still work with struggling homeowners. Unfortunately that is not the case, in order to be considered for most short sales, banks will only review if they are in default. Some banks are now requiring the homeowners to be at least 30-60 days behind on their mortgage. Although this goes for the majority of the banks, there are still a small few that will work with homeowners without being behind.
If your client stops the mortgage payment, they need to understand it maybe impossible to "catch back up". I've had a couple of clients say they plan on stopping the mortgage payments to get the bank to do a short sale and if the short sale is not approved they will get the payments caught back up.
After a client has missed several payments, the late fees and penalties can be overwhelming. This can make it outside the clients financial ability to actually catch back up.
Bottom line: Missing payments maybe necessary to get a short sale approved; however, it will impact their credit report and it make cause a foreclosure if the short sale is not approved.
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