Is it Better to Do a Short Sale or Rent Your House?

A series of finance questions must be answered when considering the options between a short sale and renting your home. This evaluation should include itemizing your personal finances while evaluating the local real estate and rental markets. The mortgage lender also plays an important part in this decision. Only after a serious evaluation of all of the factors based on your individual situation can a decision be made regarding the residence.

Definition
A short sale is a term used to describe the sale of a property for less than the amount of the mortgage owed. The lender must approve a short sale real estate contract. However, the company may require that the homeowner make up the difference between the sale price of the property and the amount of the loan left uncovered by the sale.

Rental Considerations
Rental considerations involve an examination of the amount of rent for similar homes in your area. Calculate your costs, such as the amount of homeowner association fees, property maintenance, state and local property taxes, hazard insurance and the amount of the monthly mortgage. Be aware that the rent that you are able to obtain is only what the market can bear. Analyze what homes are renting for in your immediate area and divide the amount by the square footage of those properties. Then multiply the rent per square foot by the size of your rental. You may add more for extras, such as a pool or being in walking distance of a school. This will give you an indication of how much you will be able to charge for rent. It may not be enough to cover all of your costs when repairs and vacancies are factored in. Determine if the rent that you can charge is enough to help you make ends meet. Renting also requires fees for advertising, credit checks and, occasionally, the use of a real estate agent.

Sale Expenses
Selling the property as a short sale offers additional finance considerations. Even if the lender agrees to a lesser short-sale amount, the bank may not agree to pay any of the commissions charged by real estate agents. Other typical sale expenses include title insurance, escrow fees and charges to file legal documents.

Impact
Short sales negatively impact your credit score, while renting the property will not. Experian, a major credit reporting agency, states that a determination of the credit reporting terms must be done before making a decision to sell the house for less than the mortgage amount. Most lenders file short sales as “Settled,” rather than “Paid in Full.” Experian claims that settled accounts, like those charged off, are negative on a credit report and will bring down your credit score. Since other creditors, insurance companies and even employers may use credit reports, careful consideration must be made in accepting a label of “Settled” for your mortgage loan.

Property Considerations
Homes utilized as rentals may need renovation after the lease expires and your tenants move out. Assuming that renters do not damage the property or grounds, even normal wear and tear on a home includes the need for carpet cleaning and paint after it has been occupied for a year or more. You also need to repair any items that may make the home uninhabitable. Checklists, such as the one offered to Burlington, Vermont, residents (see the Resources section), help you determine what repairs, if any, are necessary prior to renting your house.