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Short Sale Selling

I have two homes, and am selling one in a short sale. Can the bank come after my other home or savings accounts?

I have two homes, one which I owe more than its current value. The other I can afford the month payments. I'm considering a short sale on the second one. My question is: Can the bank for the short sale property come after the home I'm planning to keep? How about other assets like retirement and savings accounts?

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Bill's Answer
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Bills.com | Find Learn Save

I receive many questions related to short sales and protecting other assets. I am careful in responding because creditors are behaving inconsistently. My response should not be considered legal advice, and are observations based on what I have seen and heard from other readers.

Short sale at a glance

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 that may affect you 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.

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.

A deficiency judgment will appear on a credit report for seven years.

Recommendation

Talk to the lender on your second home 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 free, government-approved counselors.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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3 Comments

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  • DC
    May, 2010
    Drew
    Social Evolution, new products and services come and old bad products and systems go away…
    0 Votes

  • BA
    May, 2010
    Bill
    The brief answer is: It doesn't matter because both get the homeowner/seller to the same place. The longer answer is this: In a deed in lieu of foreclosure, the homeowner agrees to transfer the deed to the mortgagee in exchange for halting a foreclosure. The mortgagee (a bank typically) becomes the owner of the property. It is customary for the homeowner/seller to remain in the property until in the property, and make payments to the mortgagee until the property is sold to a buyer. In a short sale, the homeowner and mortgagee agree to sell the property for less than the balance of the loan. One is not "better" than the other intrinsically.
    0 Votes

  • 35x35
    May, 2010
    Frank
    A friend told me a deed in lieu of foreclosure is better than a short sale, but frankly, the game was on TV and the bar was noisy and I can't recall what his reasons were for saying that. Is deed in lieu better? I promise to pay closer attention to your answer than his.
    0 Votes

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