Short-Sale Homes Risky For Both Sellers and Buyers
by Richard Fonfrias,
J.D. Chicago’s Financial Rescue &
Fonfrias Law Group, LLC
Short Sale: A short sale is when you sell your home for less than the total balance on the mortgage and the lender agrees to accept the money from that sale and release the lien on the home. In this way, you avoid a foreclosure. And while this sounds good…
As the Seller, You Face Certain Risks
Risk #1: Deficiency Judgment The deficiency is the amount of the mortgage against the property (say $300,000) minus the amount for which your home sold (say $200,000). This difference ($100,000) is the deficiency that the lender did not receive from the sale. Many states permit the mortgage lender to pursue you with a lawsuit to recover the $100,000 in a deficiency judgment.
Most states allow lenders to get deficiency judgments against the homeowner. So to avoid a deficiency judgment, make sure the agreement states that the short sale is “in full satisfaction of the debt” and that the lender “waives its right to the deficiency.”
Bankruptcy: If the lender gets a deficiency judgment, you can file Chapter 7 bankruptcy to erase the debt. Or you could file a Chapter 13 bankruptcy, but Chapter 13 usually requires that you pay part of the amount owed. Make sure you discuss whether bankruptcy is a good option with an experienced bankruptcy lawyer.
Risk #2: Long, Drawn-Out Approval Process
Short sales often don’t work because of the lengthy and frustrating application and approval process. Many times the lender takes seemingly forever to decide whether it will accept the sale.
To begin the process, you must submit to the lender a short sale application. The loss mitigation department must then approve the short sale before you can complete the transaction. This commonly takes weeks or even months. Often, lenders don’t approve your first offer if it is far below the property’s fair market value. You and any potential buys often grow frustrated and give up on the short sale before it’s approved.
Expedited Process: The Federal National Mortgage Association (FNMA) and the Federal Home Loan Mortgage Corporation (FHLMC) have created an expedited short sale system so homeowners can get a quick approval.
Beginning in June 2012, for loans backed by FNMA and FHLMC, lenders must …
– Reply to a short sale application within 30 days from its receipt;
– Give you weekly updates if your application is still being reviewed after 30 days; and
– Decide whether to accept or reject the short sale and tell you of their decision within 60 days after they receive your application.
Risk #3: Second Mortgage Lender
If you have more than one mortgage on your property, then all mortgage holders must agree to the short sale. For example, the first mortgage holder will offer money to the second mortgage holder to release its lien, but if the second mortgage holder doesn’t agree, then the short sale is dead.
Risk #4: Credit Score
A short sale creates a black mark on your credit score. While it’s not as negative as a foreclosure, it still has a huge impact. And if you conduct your short sale under the FNMA or FHLMC’s expedited process, then you cannot obtain a new mortgage under either of their programs for at least two years.
As the Buyer, You Face Certain Risks
Risk #1: Unrealisticly Low Home Prices Often, the seller’s real estate agent sets a low listing price because, to begin the short sale process, the seller needs an actual offer. In response, the lender usually counteroffers with a much higher price. As a buyer, you might find that you’re wasting your time making offers on homes that you really cannot afford.
Risk #2: Property “As Is”
Homes sold by short sale are purchased “as is”, which means you buy the home exactly as it is. The seller will not pay for any repairs or improvements. Short sale homes often need a lot of repairs and maintenance because the seller may not have had the money to maintain the home.