When the proceeds from the sale of the property are not enough to pay off the entire mortgage debt or closing costs, the difference between the two is referred to as the mortgage shortfall. As a result, your lawyer will likely request additional funds on the day of closing.
Reasons for a Mortgage Shortfall Include:
- A decline in property value
- Increase in the outstanding mortgage balance,
- A combination of the above
- A borrower defaults on their mortgage loan and the property is sold as part of the foreclosure process
Mortgage Shortfall Impact on Borrowers
A mortgage shortfall can turn a smooth process into a stressful one as you run around on closing day trying to find additional funds. In addition, if the shortfall amount is substantial enough, it can have a negative impact on not just the borrower’s finances but on their credit score as well.
This typically happens if the numbers are not performed and analyzed properly by all who were involved in the mortgage process.
How to Avoid It
You can avoid a mortgage shortfall by having the numbers looked at well in advance of the closing date. However, the best way to prepare is by making sure that you have extra funds as a backup for closing. This buffer can be determined based on the type of lender you closed with.
Other actions you may take include:
- keeping track of mortgage payments and changes in property value
- refinance to reduce outstanding mortgage balance and the risk of facing a shortfall
- increase potential sale value by making improvements to the property
For more information, take a look at our closing cost guides for Triple-A Lending, B-Lending, and MIC Lending.
Proper planning can reduce mortgage shortfall risk and secure your financial future. Give our team a call today at 519-419-3825 to find out what your options are and perform your numbers the right way.
