About Short Sales

You probably already know what a deficiency judgment is. Generally, it’s a lawsuit to collect unpaid debts, and in our business, it’s a lawsuit to collect the balance due on a mortgage after a foreclosure. Not all states allow lenders to do this, but many of them do.

When you have to sell your home through foreclosure or short sale, is there any way to prevent a deficiency judgment from being awarded? What happens in those situations?

Most of the time, the only way you can avoid a deficiency judgment is by negotiating with the lender during the pre-foreclosure process. They know how expensive it is to maintain their REO properties. The lender may consent to waive their right to collect the rest of the debt if they see that it will cost them less money in the long run to allow a short sale and simply let the debt go.

When that isn’t possible, depending on state law, the homeowner may have a deficiency judgment on their hands, whether the short sale was approved or the foreclosure went through. At that point, the debt only goes away through payoff or bankruptcy.

What will be the amount of the deficiency judgment? In the case of a foreclosure, the judge will take the balance due on the mortgage and subtract the greater of the high bid at the auction or the appraised value of the home. When the house is sold in a short sale, the amount the bank received from the sale is subtracted from the mortgage balance.

So, the former homeowner now has a court order which says he has to pay the rest of that mortgage debt to the bank. If there were two or more mortgages or liens, that homeowner may even have two or more deficiency judgments against him.

Immediately after the judge signs the order, the deficiency judgment begins earning interest. If the lender adds its REO expenses to the balance, the interest just keeps climbing higher. There is an interest rate of 11 percent per year on deficiency judgments in Florida. What’s the rate in your state?

The debt is usually sold afterward for 5 to 10 cents on the dollar. Banks don’t see much point in trying to collect those debts themselves, especially since most homeowners with that kind of debt are broke. They would rather take the 10 percent now than hope for a larger payment later while keeping the debt on the books.

Besides the deficiency judgment, the former homeowner also has a wounded credit report and a lower FICO score. Having a foreclosure on record is one thing, but a deficiency judgment or a low FICO score could influence a critical decision by others on whether to give that person a job, a loan, or a rental home.

With the number of foreclosures increasing faster than ever, the number of deficiency judgments are increasing right along with them. As the government re-evaluates how foreclosures are done in various scenarios, they may also reconsider how deficiency judgments are handled as well. On the other hand, they may not.

In the meantime, if you are about to lose your home, your best bet is to try talking with the lender. You or your agent may be able to help their loss mitigation department see how cost-effective it is for them to tell the credit bureaus that your mortgage is “paid in full as agreed.” If you don’t take the time to negotiate now, you could be paying for it later.

Need to learn more about foreclosures? Visit the Strategic Real Estate Coach website. You’ll be able to register for weekly updates on the latest developments in the mortgage industry and more!

Consumers need to be aware that there is a big difference between getting a loan modification and going through a short sale. Both of these methods may help a homeowner avoid foreclosure. They are taken care of through assessment and approval in the loss mitigation department of your lender. However, they will not have the same result with respect to your financial situation.

When you are considering a loan modification the bank will try to modify some of the conditions of your original loan. There are a variety of conditions the bank may want to change. That includes lowering monthly payments, reducing your interest rate or forgiving late fees and other penalties.

A short sale is where the bank agrees to allow you to sell your home for less than the balance remaining on your mortgage. Your lender then agrees to forgive the shortfall of funds remaining after the sale proceeds have been received.

Three advantages of loan modifications are:

1. You effectively stop foreclosure proceedings and get to stay in your own home without the hassle of moving or finding a place to rent. 2. Reduced monthly payments or lower interest costs means you have more time to get yourself back on your feet financially. 3. You’re able to minimize the amount of damage done to your credit score.

Here are three disadvantages of loan modifications:

1. You could get your mortgage payments and fees reduced, however, it might not be good enough to help you get back on track. 2. If you miss a payment in the new agreement you will find yourself facing foreclosure again. 3. You may only get your monthly payments reduced for a short period of time. After that period of time is over your payments could go right back up to where they were. If you are not prepared you will be facing financial problems.

Advantages of doing a short sale:

1. A short sale will allow you to get out of debt rapidly. You will not have to deal with monthly mortgage payments and you can have the chance to get back on your feet financially. 2. If your house is worth much less than you owe to your lender, a short sale is probably the only way you can sell your house and get out from under your debt. 3. Most lenders will not come after you for any loss they experience from a short sale. Your debt gets eliminated completely.

Disadvantages of short sales:

1. Your lender may report the forgiven portion of your mortgage to the IRS. This could mean you face a tax liability next year. 2. Once your home is sold, you’ll need to move. Finding a rental property could be difficult if your landlord is sensitive to your delinquent payment history and damaged credit. 3. You won’t be able to apply for a new mortgage any time soon. Other lenders will be wary of customers with a history of having outstanding debts forgiven rather than repaying them.

While there are definite pros and cons to both loan modifications and short sales, it’s apparent that trying to stay in your own home and paying your debt will work in your favor. After all, your financial problems could only be temporary. If you accept a loan modification and get back on track, you continue to live in your family’s home and maintain a clean credit file. I you go through shortsale you will wipe out your debt, however, you will have to start from scratch.

When you are a homeowner struggling with your mortgage payments you should understand the difference between a short sale and a loan modification. Both of these methods may help you get out of a foreclosure situation. They are dealt with in the same department of your bank by a loss mitigation professional. Homeowners should be aware that the approach you choose may have a very different results on your finances.

Initially, many homeowners choose a loan modification. The modifications can come in the form forgiveness of late fees, a reduction in monthly payments pr lower interest rates. You can get one pr more conditions of your mortgage modified, depending on what your bank will agree to do and what you can afford.

A short sale is where the bank agrees to allow you to sell your home for less than the balance remaining on your mortgage. Your lender then agrees to forgive the shortfall of funds remaining after the sale proceeds have been received.

How are you going to benefit from a loan modification on your home mortgage?

1. You will not have to worry about finding somewhere else to live, because you will stop foreclosure proceeding right in their tracks. 2. If you are able to get payments or fees reduced, you will have extra time to get your finances in order. 3. There will be less damage done to your credit score.

Here are three disadvantages of loan modifications:

1. The reduction of your monthly payments might not be enough to completely free up your cash flow. 2. If you miss any payments on your modification agreement, then your lender could begin foreclosure proceedings again. 3. Your lender may offer modified payments only for a short period of time. This means the payments may go back up in the future, which could increase financial stress if you’re not prepared.

A short sale has these three great benefits:

1. As soon as your home is sold your debt will vanish, this means no more monthly payments. 2. If you have come to the conclusion that your owe more than your house is worth and there is no possible way to increase the value of your property then a short sale could be just the right solution. 3. Most likely your bank will agree to forgive the difference between the amount you owe on your mortgage and the lower the sale price of your home.

There are three disadvantages of short sales:

1. Your lender may report the forgiven portion of your mortgage to the IRS. This could mean you face a tax liability next year. 2. Once your home is sold, you’ll need to move. Finding a rental property could be difficult if your landlord is sensitive to your delinquent payment history and damaged credit. 3. You won’t be able to apply for a new mortgage any time soon. Other lenders will be wary of customers with a history of having outstanding debts forgiven rather than repaying them.

As you can see there are definitely both good and bad points in either a loan modification or a short sale. It is our experience that most consumers want to find a way to stay in their home and pay off their debt, especially, if their financial problems are just temporary. If you are completely overwhelmed with debt and there is no end in sight to your financial hardship, the road of a short sale may be the best solution, because it allows you to start fresh.