Foreclosure Short Sale - The Bills.com Blog

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Foreclosure Short Sale

Monday, Jun 18, 2007

Question: I was laid off 3 months ago from circuit city. I owe absolutely nothing, no first home bills, credit cards or car payment. The only thing I owe is $400k on my "second home" in Las Veges. My payments are over 3k a month. If I sell the home I will be losing out one 30k and I don’t have that much. Should I stop paying the mortgage and let my bank foreclose on me, or do a short sale?

Answer: Generally speaking, allowing a home to go into foreclosure is not a good idea for consumers, as you will lose any equity that you have built in the home and take a terrible credit impact. In some cases, though, consumers have no choice but to allow a foreclosure to proceed.

You state in your question that you will "lose out on 30k" if you sell the home. I assume that you mean that you owe $30,000 more on the home than it is worth. You need to rid yourself of the home, as you cannot afford the mortgage payments, but unless you plan the sale or foreclosure carefully, you could be left with a large deficiency balance, which could result in a judgment against you.

The easiest way that you can free yourself of this obligation without owing a deficiency balance is through a "short sale," in which the mortgage holder agrees to accept less than the balance owed on the mortgage at sale to prevent foreclosure. The lender would much rather see you sell the property than be forced to take the property through foreclosure, as foreclosure is a costly and time-consuming process. You should contact your
mortgage lender to discuss what it can do to assist you in selling the property through a short sale, and what are its procedures and requirements. Explain to the lender that you cannot afford your mortgage payments, and that you need to sell the property through a short sale to prevent foreclosure.

To read more about short sales, About.com has a great article on How to do a Short Sale.

Given the information you have provided, I think a short sale may be the best solution available, if your lender will allow it.

If the lender will not allow you to sell the home for less than you owe, you may have no choice but to allow the home to go into foreclosure, although foreclosure presents major problems. Foreclosure auctions tend to bring significantly less money than a normal sale would bring. If the sale brings less than the amount owed on the loan, the remaining balance of the loan may be considered a deficiency balance. Nevada law allows creditors to collect deficiency balances on home loans, meaning the creditor could sue and obtain a judgment against you if there is a deficiency balance. Given that you owe $30,000 more than the home is worth, foreclosure will probably result in a large deficiency balance,
which could cause your significant problems in the future, such as wage garnishment and bank levies. Clearly foreclosure is not an attractive option, and should be avoided if at all possible.

If you have no choice but to allow foreclosure, you may be able to mitigate the negative impact of a deficiency balance by filing bankruptcy. Generally speaking, deficiency balances are treated like any other unsecured debt in bankruptcy, meaning that they can be wiped clear by Chapter 7, and repaid over time through a Chapter 13. If your lender will not allow a short sale, you should consult with an attorney to discuss the legal implications of foreclosure and bankruptcy before you decide how to proceed. You can also visit Bills.com to find out more about bankruptcy. No one wants to file bankruptcy, but you may find that bankruptcy is the best solution to your problem if the mortgage lender will not allow you to sell the home through a short sale.

To read more about foreclosure, I invite you to visit the Bills.com Foreclosure information page.

I hope that you are able to find a workable solution to your problem, and that the information I have provided helps you Find. Learn. Save.

Best,
Bill
www.bills.com

Also, make sure to get a free financial health check-up with Bills IQ!

User Comments

1. Posted by Willie L. Armstrong on Monday 1st October 2007 14:22

I would like to know why a bank claims it has to report a short sale as a foreclosure/short sale rather than just a short sale when the home was sold before auction. The auction was scheduled but posponded while the short sale was considered. It has been approved now and ready to close but the bank insists on reporting it foreclosure/short sale.

2. Posted by Nathan on Tuesday 2nd October 2007 08:37

I think it’s because of the timing of what happened. Maybe your loan was already foreclosed upon since the auction was scheduled. I think the lender just offered a grace period to see if the short sale was something agreeable. If it wasn’t then they would still foreclose on the property since it was already at that stage. There are people that do a short sale while still making a payments on their mortgage as to not ruin their credit. Just a thought.

3. Posted by bradfords on Tuesday 2nd October 2007 08:38

I think that sounds right. If you think it was listed in error, you can always go the route of trying to get credit repair and clean up the record listing to be listed appropriately as a sale/closed account and not a foreclosure (which will really negatively impact your credit).

4. Posted by Jessica on Wednesday 16th April 2008 16:24

I am a REALTOR in Las Vegas and need to know if it is allowable for a Lender, who has agreed to a short sale, can legally pursue a deficiency judgment for the short balance after the Close of Escrow.

5. Posted by Bill on Thursday 17th April 2008 18:11

If a lender agrees to a short sale then the lender is fully aware that the proceeds of the sale are not going to meet the total debt owed. I doubt that a lender would be able to pursue a legal case to recover the deficiency balance, given that the it has also agreed for a short sale. But I am not a legal expert and varying state laws might apply, my suggestion is to contact a qualified attorney to clarify your question.

6. Posted by Arun on Sunday 4th May 2008 22:56

The short sale is listed as a 'settled debt'. Here's the problem, unless your late on payments the bank won't even consider a short sale and puts you closer to forclosure.

7. Posted by Valerie on Monday 12th May 2008 04:18

After lots of internet research and hours of reading, I am confused about Nevada being a recourse or non recourse state and how I can find out what type of mortgage I have. I am about 139K-219K upside down in my home depending on who I talk to and based on the FMV of my home today. The payments between the 1st & 2nd, both original loans for a 100% loan, runs around 3800 mo. This is not affordable and we have been pleading with our mortgage companies to help us, help get us into a honest home value loan modification, reduce the principal balance or what ever to make this loan affordable but they just won't budge and want to make it higher and worse on us. The real estate professionals advise us to stop the bleeding and get out now: foreclosure or short sale. In either case we are screwed right? Due to the huge deficiency we face being sued for moneys we just do not have. We can't afford to seek legal counsel or hire an attorney. If we could, we should sue the broker who lied to us and said he qualified us with 100% documented income but evidently did not and the appraiser who appraised the home for exactly what we needed for the loan opposed to doing a honest appraisel when asked. He did not use a home just doors away, by the same builder, in the same development, twice as big as ours, and sold for tens of thousands less just months prior. Anyway, any words of advise, I need to sleep at night, this stress is going to cause me even more problems. Oh, we do have a second home that is much less per month and not as upside down. That home, Chase did a loan modification for me, no problems. If we get foreclosed on in our primary residence, move to this other home, can the other mortgages come after that home for a deficiency judgement? Home ownership is not what it is cracked up to be! Renting is much less stress and does have its advantages!

8. Posted by Naveen on Monday 12th May 2008 08:35

A definition of a non-recourse loan is one where ONLY the secured interest can be taken to recover the loan amount. Do not confuse whether certain state laws define certain loans by default to be non-recourse. In Nevada I believe mortgages are recourse loans. The forecloser has 90 days to start a deficiency judgment action. The "forgiveness" in a short sale is taxable unless you qualify for the forgiveness. In your case, if the particular home that you are having trouble with is not your primary residence, then it probably means you DO NOT qualify for the tax exemption either. Check out this link for a good informational video presentation: http://www.mortgagereliefformula.com/recourse/

9. Posted by Tyler on Thursday 26th February 2009 12:40

So, I do about 50 short sales a month. I would say I am fairly knowledgeable in the field. Still, the foggy area is the issue with the banks claimg they will go after the homeowner for the deficiency balance after they have agreed to release the lien through a short sale. Every bank interperets this diferently to me. I know that in most states(for sure CA), there is the law that restrics the lender to a single action on the property during foreclosure. This issue is only with second liens, but they state in some of their approval letters that they reserve the right to go after the homeowner for the deficiency balance. What benefit does the short sale now have to the homeowner if they are still exposed to the same negative effects as a foreclosure? Does anyone know where I can read the actual laws on this?

10. Posted by Kevin on Saturday 23rd January 2010 19:54

In the state of FL. is a creditor able to persue a judgement against a homeowner after a foreclosure?

11. Posted by Bill on Sunday 24th January 2010 12:27

In Florida, a lender can pursue a deficiency for up to four years. See Florida's Chapter 702: FORECLOSURE OF MORTGAGES, AGREEMENTS FOR DEEDS, AND STATUTORY LIENS for details.

12. Posted by Kevin B Jameson on Sunday 31st January 2010 11:25

Ok, so in the state of FL. a creditor can sue to recover a deficiency after a forclosure. can they then place a lien against another property that the person(s) being foreclosed against own in another state (MI.)?

13. Posted by Bill on Sunday 31st January 2010 11:50

Yes, a debt in one state can be domesticated in a sister-state for collection there.

14. Posted by Kevin B Jameson on Sunday 31st January 2010 14:21

if u have no other option other than to allow forclosure on home, what can u do to protect another home that u can afford to keep payments current. figuring that the forclosing home is recieving no assistance from lender (short sale and rework of mortgage has hit a wall)?

15. Posted by Bill on Sunday 31st January 2010 23:24

One possibility, if you are married, is put one house is spouse A's name and the other in spouse B's. One spouse can be a "lifeboat" while the other takes the legal and credit report hit. If the "saved" house is in Florida or another state that allows 100% exemption, that house cannot be touched by a judgment-creditor. Consult with an attorney in your state who has experience in bankruptcy law who will be able to review your entire financial picture and advice you accordingly.

16. Posted by Greg Holland on Tuesday 16th February 2010 20:48

In Dec08 I cosigned for a 300k home in Las Vegas with my daughter. She and her boyfriend subsequently lost their jobs there and moved back to our house in California. I am trying to figure out what to do with the Vegas house. I guess I have "deep pockets" and could afford to keep making the mortgage payments and rent the house for about a $1000/mo shortfall and hope for a recovery in the distant future or else sell the house now for a huge loss. I wouldn't go broke in either case but I would obviously like to minimize my losses. Anyone have any suggestions?

17. Posted by Bill on Tuesday 16th February 2010 21:05

Greg: Look into a short sale. See the Bills.com resource Deed In Lieu Of Foreclosure vs. Short Sale for a more extensive discussion of this subject.

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