Acceptable Hardships
A hardship can be defined as: A material change in the financial situation of a homeowner that is or will affect their ability to pay their mortgage.
The homeowner must have a hardship in order to qualify for a short sale. Examples of acceptable financial hardships are:
1. Loss of job
2. Business failure
3. Damage to property
4. Death of a spouse
5. Death of family members
6. Severe illness
7. Inheritance
8. Divorce
9. Mandatory job relocation
10. Medical bills
11. Military Service
12. Payment increase or mortgage adjustment
13. Insurance or tax increase
14. Reduced income
15. Separation
16. Too much debt
17. Incarceration
Loss of Job
When an individual loses employment, the loss of income is most often immediate, and very quickly financial distress can occur and seem insurmountable.
Business Failure
For a small business owner, the devastation of a business failure is often followed by the inability to pay mortgage payments and the loss of their home.
Damage to Property
Many times insurance companies do not cover the full amount of damage to a property and homeowwners are unable to make repairs. Some homeowners have to use insurance funds to survive and find new living arrangements.
Death of a Spouse
The death of a spouse is davastating to a family, and if the person was also one of or the only wage earner, this will almost always cause financial distress.
Death of family members
The death of a family member, regardless if they are a wage earner or not, can throw a family into emotional and financial turmoil.
Severe Illness
Severe illness and the medical bills involved along with the time that it takes away from a family's productivity can cause bills to be missed and homes to go into distress.
Inheritance
Rarely does someone think of an inheritance as a means for distress. However, heirs are left to pay mortgage bills, utilities and maintenance that they did not expect. Imagine a son who makes $60,000 a year whose parents pass away and leave him with a $700,000 mortgage and payment on a $1.5 million property. He will quickly need to find a payment solution (which there may not be) or liquidate the property and satisfy the mortgage. As you can see, even properties with significant equity can be in danger of being lost to foreclosure if a solution is not implemented.
Divorce
It goes without saying that divorce is one of the most common reasons for financial distress in the real estate market. These situations, even when amicable, many times become challenging, and there needs to be communication and trust developed between both homeowners involved.
Mandatory Job Relocation
The homeowners may be required to sell their home due to a mandatory job relocation. They may not have any equity in their home due to price decreases in a down market. Homeowners do not always have control over where they are going live. Many relocations are necessities not choices. This can quickly cause unexpected distress since very few homeowners can support two households for any significant length of time. However, it is not considered a hardship if homeowners decide to transfer jobs on their own and the transfer is not mandatory.
Medical Bills
Serious illness can create extremely high medical bills that may not be covered by insurance or the homeowner may not have medical insurance through their employment.
Military Service
Except for the relief provided in very specific situations by the Service persons Civil Relief Act (SCRA), military service can lead to unexpected financial issues. Service persons, who have had their periods of active duty extended, are suffering a tremendous amount of financial pressure.
Payment Increase of Mortgage Adjustment
This is the single largest reason for distress in today's market. Although mortgages increase on a schedule and owners know they are coming, many do not do anything until it is too late or even worse, they do not think they have any options.
Insurance or Tax Increase
For many homeowners just the increase in taxes on an annual basis or the increase in an insurance payment can cause a family to lose a home or go into financial distress.
Reduced Income
If a person is in a commission based business and the economy suffers, often times their income suffers. Also, many businesses are reducing employee compensations to make up for lost revenues that corporations have suffred.
Separation
When a couple decides to separate even though they are not actually divorcing, the cost of maintaining two households can cause the loss of a primary residence.
Too much debt
For a family with credit card debt, even minor increases in their interest rates can make the difference between paying all their bills and missing payments.
Incarceration
In this case, the incarcerated person has lost their source of income and the remaining family members may not be able to maintain the monthly mortgage payments.
Insolvency
Homeowners must not be able to "Pay Down" their Mortgage. A short sale homeowner has to be financially insolvent. For the purposes of a short sale this means that homeowners have to owe more than they have available and the homeowner does not have liquid cash or assets that could be used to buy-down their mortgage. Moreover, the homeowner must have a "shortfall" or an anticipated "shortfall" where their income would be less than their expenses.
If homeowners do have liquid cash or assets, they will be expected to use them to pay down their mortgages. We have seen cases where a homewoner made a contribution towards the sale of the property but was still short and the lender covered the remaining shortfall.
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