Short sales are part of the housing market and they will not be disappearing any time soon, yet many people still do not understand some of the short sale basics. Hopefully this will clear things up.
1. Do you have to be delinquent on your mortgage payments to short sale? No. This is a common misconception, but not a requirement, however there are some caveats. If you are current on your mortgage payments but have a medical hardship which can be documented, you can get a short sale approved. Other hardships – like divorce, job change – could also qualify. If you have more than one lien you’ll need to find out the policies of each lender. Some lenders are flexible and will approve short sales for other reasons, so don’t just stop paying your mortgage until you get expert advice.
2. Are you liable for the deficiency (difference between what the home sold for and what you owed on your mortgage(s)) with a short sale? It depends where the property is located. Some states allow lenders to pursue deficiency judgments, some do not. California does not allow lenders to go after this difference if it has agreed to a short sale (but not in the case of second homes and subsequent lien holders – unless they release their right to do so with language to this effect in the approval letter). Make sure to speak with an expert so you understand how you could be effected.
3. Can you short sale a second (non primary residence) home? Yes. The one thing to watch out for are subsequent liens on the property. If there is a second lien holder involved there could be a chance they could come after you for the deficiency, so you need to get expert advice before making any decisions. Most second lien holders will agree to put language protecting you from future litigation for the deficiency if your agent/negotiator asks for it.
4. What is the difference between a short sale and a deed in lieu of foreclosure? A short sale is when you sell your home to a third party purchaser, by way of a real estate contract, for less than the amount owed on your mortgage, with the lender’s approval, and normally do not have to pay the fees and costs associated with the sale. A deed in lieu of foreclosure is when the bank agrees with you to take back the deed to your home, in exchange for a promise not to foreclose. Deeds in lieu are more rare than short sales, as banks would rather short sale the property to save money (although judging from the time it takes them to approve many deals you may have thought otherwise). It is important to note that a deed in lieu looks much like a foreclosure, and could have similar tax consequences – speak with your accountant and other professionals before considering any option.
Short sales can be a good way to avoid foreclosure, but can involve credit and tax consequences, as well as the potential for liability on the deficiency in some states. Before deciding to short sale your property make sure you understand all the options available to you so that you can make an informed decision. Most importantly, consult with your accountant and attorney no matter which option you choose; should you decide to short sale, you also should speak with Realtor who is highly knowledgeable about these sales.