Hello! Today's post is from Alaya and what she learned from experiencing a short sale. Alaya is the blogger behind Hope+Cents. After dumping her own debt, she has become passionate about helping others do the same and shares tips, encouragement, and hope for those looking to take control of their finances.
Over nine million Americans lost their homes between 2006 and 2014 to a short sale or foreclosure during and after the housing crisis, according to the Wall Street Journal. I have the dubious honor of being a part of that group.
My family and I purchased a home in 2006 at the height of the housing bubble. In 2012, as a result of a job loss that led to employment in a new state, we needed to sell our home. Because we owed more money on our mortgage than our home was worth, we chose to do a short sale.
Losing or giving up your home is a tough pill to swallow. Home ownership is after all “the American Dream,” and when it doesn’t go quite as planned you can kind of feel like you failed. When it comes to dealing with our mistakes and failures, we have two choices: we can wallow in them, or we can learn from them. I have chosen to learn from the mistakes that led to my short sale (after maybe just a little wallowing).
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These lessons can be applied to making any significant financial decision. Here are seven lessons I learned from my short sale.
1. Do Not Allow Social Pressure Guide Your Financial Decisions
I should never have bought my house in the first place. We did not purchase our home after months or years of patiently saving up and scraping together a down payment. Rather, we had no money to put down and were saddled with consumer debt.
Despite the fact that we were financially underprepared for homeownership, we pursued it anyway because “everyone” we rubbed elbows with at the time owned their homes. I distinctly remember driving around our suburban town pining after life in a house. I mean seriously, life had to be better in a two-story colonial, right? We allowed our financial decisions to be dictated by what appeared to be the social norm.
If you find yourself considering financial decisions based on what you think you should be doing or based on what others are saying you should be doing, recognize that as social pressure. The only decisions you should make are ones that are right for you and your financial situation.
2. Do Not Make Financial Decisions You Do Not Understand
When I was going through the process of looking for a home, I knew and understood exactly two things about buying and paying for a house: One, I wanted a house, and two, I needed a mortgage to get one. That’s where my understanding ended.
Without realizing it, I was relying on my real estate agent, my mortgage broker, and everyone else in the process to point me towards decisions that would benefit me. Well, all those people like to eat, and they like to pay their own mortgages, so at the end of the day, they were steering me towards decisions that would benefit them.
When the terms of my mortgage were presented to me, I didn't understand them. But that didn’t matter because I was getting a house. I signed on the dotted line—over and over again.
In hindsight, I should have educated myself on the terms of the mortgage. Perhaps a full understanding would have led me down a different path.
If you do not understand the details of your financial decisions, don’t make them until you do. It’s okay if you don't understand something initially. It’s not okay to move forward and make a major financial decision in ignorance.
3. If Your Financing is “Creative” That’s a Sign You Can’t Afford It
The financing for my home was what I like to call a variety pack of mortgage terms. You name a creative (a.k.a. bad) mortgage term, we had it.
A first and second mortgage, a HELOC (home equity line of credit), adjustable rate, interest only…the only thing missing was a balloon payment. Oh wait, somewhere in the six years we were in the house we did a loan modification, and the new terms included—you guessed it—a balloon payment.
All of that finagling and forcing to get us into a mortgage was a sign that we could not afford it. I remember my mortgage broker telling me all I had to do was, “make payments on time for two years and then refinance.” Knowing what we know now about what happened to the housing market between 2006 and 2012, we can all let out a big laugh (or cry) at that suggestion.
I might be stepping on toes here, but if the only way you can afford something is to get creative in your financing (à la borrower assistance programs, little-to-no-money down programs, extended payment terms, or by forcing it in some other way) that is a huge warning sign that you cannot afford what you are pursuing. Please heed the invisible caution sign.
4. You Know That Voice You Hear, Telling You Something’s Not Right? Listen to It.
Looking back at the process of purchasing my home, deep down I knew I couldn’t afford it. I mean our financing was so creative it actually could have been considered art.
I had misgivings both during the process of purchasing the home and years into the mortgage, but because we’re masters of telling ourselves what we want to hear, I silenced that little whisper and told myself things were fine. If the banks were lending us the money, then we were good, right? I wanted that house, and I wanted it badly.
The fact that my mortgage broker talked to me about a refinance before I even closed on the mortgage wasn’t a whisper—it was a loud siren going off in my ear. I managed to silence even that.
I should have paid attention to the inkling that things weren’t right. I should have listened to that voice. It was the voice of reason. When you hear it, listen to it.
5. Be Aware of What You Are Sacrificing
For the six years we were in the house, we never missed a payment before entering the short sale process. It was important for us (as it should have been) to pay our mortgage and to pay it on time.
This meant we were making those payments—which at their highest represented as much as 50% of our take home pay—at the expense of other things. Things like college funding, retirement, maintenance of the house, and life. I think if we knew what owning that home at that time would mean for us in the long term we may have made different choices. Maybe not—we wanted what we wanted, and we wanted it NOW!
Count the costs of your financial decisions carefully, and be aware of what you may be sacrificing down the road.
6. Accept Responsibility and Own Your Financial Mistakes
I do not blame the economy for the loss of my home. The responsibility lies with me and the choices I made. Everyone’s story is different, and I cannot speak for the millions of other homeowners who lost their homes. In my case, though, I don’t view myself as a victim of the economy, but rather a victim of my poor choices.
Four years into owning the home and before the job loss, we woke up the financial mess we were in and went on a journey to eliminate the $74,000 of consumer debt that we had. That was an amazing accomplishment for us. Short selling our home was not how we envisioned becoming 100% debt-free, but it provided us a path to exit a situation we should never have entered.
I’m not thrilled that I went through a short sale, but I have stopped being embarrassed by it. I made a mistake. We all have. Owning the role you play in your mistakes allows you to learn from them.
7. Pursue Your Financial Dream Your Way
Currently, I am renting a house while I wait to pursue homeownership again along with the 2 million other boomerang buyers estimated to reenter the housing market over the next few years.
I am often asked when I am going to buy a house. Those questions as well as the comments that I’m “throwing my money away on rent” put me right back where I used to be in regards to experiencing social pressure. I have to remind myself that I’m pursuing my dream my way and in my timing.
Thankfully, I am better equipped to resist that pressure, although sometimes I feel like the married couple without kids who is always asked when they’re going to have children. (If you're a married couple with no kids AND you rent, well God bless you. I feel your pain.)
While I like the idea of owning a house again, I am also inspired by the countless stories of people who have chosen to challenge our culture's picture of traditional homeownership or are forgoing it altogether. Owning a home may be considered the American Dream, but if that’s not your dream, that’s okay.
Whatever financial goals and dreams you have, pursue them boldly, in your way, and in your timing, even if they don’t line up with what everyone else thinks you should be going after.
My Short Sale Came With a Bonus Lesson
Woven through each of these lessons is another one: patience. Impatience led me to purchase a home I could not afford and had no business buying. And losing it taught me patience. Years after signing those final papers, the lessons in patience still continue, and I know that I will be able to apply them to my next home-buying experience.
I’m a big believer that our mistakes and failures are not made in vain. As Henry Ford put it, “Failure is only the opportunity to begin again, only this time more wisely.”
I look forward to beginning again.
Did you experience a short sale, foreclosure, or other financial loss? What have you learned?
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