Short Sale at a Glance
How do I start a short sale? If there is a deficiency balance, are my retirement savings at risk?
The balance of my mortgage loan today is $326,000, which is $111,000 more than it is worth. At present I am paying an interest-only modification that will last two more years. It increases from 2% to 3% this Dec. and from 3% to 4% in Dec. of 2012 then it goes up to 6%. I have been able to afford the 2% payment, but the 3% will start to cause hardship. The reason the balance got so high is because I was in a negative amortization loan for about a year before I got the modification. The lender convinced me that I would be ok and able to sell my house for all that I owed. They were wrong and now I want to sell my home using the short sale option. I am current on my payments, but soon I will not be able to afford them. How to I go about starting the short sale process? I have been told by my employer that this year coming school year is the last they will have a position for me. I plan to retire next year. I am divorced and have no other income, but I do have retirement saved. Can the bank come after my retirement? I reside in Nevada.
I receive many questions related to short sales and protecting other assets. I am careful in responding because creditors behave inconsistently and, in my opinion, illogically given the facts in those situations.
Short Sale at a Glance
Contact your mortgage servicer (most likely a bank) and ask the customer service representative to speak with the department that handles short sales. Each mortgage servicer handles short sales differently, and each has their own standards, procedures, and rules for processing short sales and deeds in lieu of foreclosure.
A short sale is where a mortgagee (most likely a bank) agrees to the sale of a property for less than the balance of the loan. The new owner is not liable for what is known as the "deficiency balance."
A deficiency balance is the difference between the total unpaid balance of a mortgage (includes principal and all unpaid interest, penalties and legal or other fees) and the amount that the lender is able to recoup from the short sale (the sale price of the home, net real estate agent fees, unpaid property taxes, maintenance and other expenses).
In some instances, the mortgagee will write a contract whereby the former owner agrees to pay the deficiency balance. In other instances, the mortgagee will agree to forgive the deficiency. One Bills.com reader reported the mortgagee agreed to forgive the deficiency if the reader's financial situation remained the same. However, if the reader came into a windfall (winning the lottery, for example) the debt would be owed. A time limit was placed on this condition. As you can see, making a broad statement about a former owner's liability in a short sale is difficult given the inconsistent behavior of mortgagees.
A new wrinkle in short sales is the Home Affordable Foreclosure Alternatives (HAFA) program. If a mortgagee participates in this federal program, it may not collect a deficiency balance from former owners. HAFA also sets rules and deadlines for processing short sales. However, to date I have not seen evidence the rules are enforced or followed widely.
Short Sale Liability
If the mortgagee decides to pursue the former owner for the deficiency balance legally, it will file a lawsuit in the state where the former owner resides. If the court agrees with the mortgagee, it will issue an order called a deficiency judgment, which allows the judgment-creditor (the mortgagee) to collect the debt.
See the Bills.com resource collections advice for details on liens, wage garnishments, and levies. This resource will answer your questions about the safety of your retirement and savings accounts. Also see the Bills.com anti-deficiency page to learn if lenders in your state can collect a deficiency balance for a short sale. California, for example, does not allow the collection of deficiency balances on short sales.
A deficiency judgment will appear on a credit report for seven years.
Wage Garnishments or Bank Levies
Social Security benefits, pension payments, and many other types of income for the retired and disabled are exempt from garnishment, which means that most elderly Americans do not need to fear wage garnishment if they are unable to pay their bills. For more information on garnishments, levies, and liens read Advice on Judgment Garnishment and for more on retirement benefits.
For specific information on Nevada see the article Bills.com wrote on Mortgage Foreclosure Nevada. Talk to the lender before committing to the short sale to determine whether it is participating in HAFA. If not, ask if it will pursue the deficiency balance through a deficiency judgment.
If the mortgagee agrees not to pursue it, get it in writing. If it will pursue the balance, negotiate it away from this option. The mortgagee is motivated to get this situation settled, so as a result you have some (though not a lot of) leverage at this point.
If they insist that they will pursue the balance, you should contact Hope Now and review your situation with its counselors.
I hope this information helps you Find. Learn & Save.