A short sale is a type of real estate transaction. When a homeowner has defaulted on one or mortgage payments, the homeowner may avoid foreclosure on the home through a short sale.. In a short sale, the homeowner sells the property for a price lower than the mortgage debt. In some states, the lender may sue the homeowner for the amount of money needed to cover the remaining mortgage debt.
When Does a Short Sale Take Place?
A short sale is referred to as a “pre-foreclosure” sale. This is because a short sale usually takes place between the time the lender begins the foreclosure process, and the end of that process. The end of the process is the foreclosure sale by the lender.
How Does a Short Sale Work?
If a borrower has exhausted other options, including forbearance, loan modification, or bringing an account current, then the borrower can consider a short sale. The lender must agree to the sale. That is, the lender must approve of the buyer. Once the lender agrees to the transaction, when the transaction goes through, the money received by the seller from the buyer is applied to the mortgage debt.
Many lenders will agree, before the sale takes place, that the money received through the sale will satisfy the debt “in full.” This means the lender will “eat,” or absorb, the costs represented by a sale that does not fully satisfy the debt.
For example, an individual may owe $400,000 in mortgage debt. If the short sale goes ahead for $350,000, then the lender may not “go after” the seller for the $50,000 needed to satisfy the entire mortgage debt. The lender may not “go after” the buyer, either.
Other lenders will hold the seller legally responsible for any “deficiency” needed to pay off the entire mortgage debt. Lenders who do this may attempt recover the remaining $50,000 from the buyer, by suing the buyer in court.
In some states, the decision as to whether to seek the entire unpaid debt is not up to the lender to make. Some states have what are called anti-deficiency laws, which limit the amount of money the lender recoup through the short sale.
These laws typically only allow the lender to recoup the amount yielded by the sale, and no more. Other states permit lenders to sue for the entire value of the debt. In these other states, the lender can file what is called a “deficiency judgment” action. In this action, a lender seeks recovery of the remaining mortgage debt in court.
What are the Implications of a Short Sale?
When a short sale is completed, the seller no longer has ownership rights in the property. Instead, the house is now owned by the buyer. Because the seller no longer owns the house, the seller must find a new residence.
This may prove difficult because the seller’s credit score may already have decreased as a result of missed mortgage payments. Lower credit scores are not looked favorably upon by landlords and banks that provide mortgages.
In addition, the seller faces tax implications from a short sale. Under the federal Internal Revenue Code, forgiven or cancelled debt is generally considered income. Individuals must report this income as part of their overall income.
This means that if the lender has decided not to pursue the amount needed to satisfy the entire mortgage debt (say, $40,000), that amount can count as income. Individuals may be able to avoid having that money count as income if they are deemed insolvent, which means their assets are exceeded by their liabilities. Successful filing of a Chapter 7 bankruptcy eliminates the deficiency judgment.
Can Issues Arise with the Short Sale?
Issues may arise that can either delay or prevent a short sale from going through. A short sale, just like other home sales, requires the buyer to deliver a clear title, which means the property cannot be “burdened” by prior mortgages, outstanding tax debt, property taxes, or unpaid utility bills.
If any of these burdens are discovered during the short sale process, then the buyer will have to “clear” title and pay off these expenses. Clearing title can be time-consuming and might delay the sale.
In addition, one or both parties to a short sale transaction may fall victim to fraud. In one type of fraud, the seller, who is in a hurry for the sale to go through, enlists the services of a person representing themselves as a “short services negotiator.”
This person claims they have the ability to promptly sell the property. The person will request a percentage of the purchase price as their “fee.” The seller, anxious to complete the sale, will pay the fee before the sale takes place. The “negotiator” turns out to be someone who has nothing to do with the transaction, and then disappears, having pocketed the money for doing nothing.
Can a Lawyer Help Me With a Short Sale?
If you need to sell a house through a short sale, then you should contact a real estate attorney. An experienced real estate lawyer near you can explain the process, the risks and benefits, and assist you in completing the sale.