OfflineFrom another newsletter I got from Equfax.. I hope it will be to some help...
If your house is worth less than the mortgage amount, you're underwater with your loan. And that means you could be facing a short sale nightmare.
If you want to sell your house, unless you plan to come to the table with enough cash to make up the difference between what you owe and the sales price you'll have to ask your lender to approve a short sale.
Short sales have been all over the news lately. Sellers like them because they are better for your credit history than a foreclosure on the loan. Buyers like them because they can get property at a substantial discount over the price of comparable homes in the neighborhood.
But there are a number of reasons why doing a short sale might come back to haunt you, whether you're a buyer or a seller.
Short Sale Problems for Sellers
1. The lender can take so long to make a decision that you lose your buyer. It's common for lenders to take six months or more to approve or reject a short sale. Lenders say they have to contact the investors on the loan and gain their approval to do the short sale, and that takes time. But if it takes too much time your buyer might decide to find another property to purchase and cancel your agreement.
2. Your second lender might not agree to the short sale. Second, or third, lenders don't like to approve short sales, because if the primary lender isn't being paid in full, it's unlikely the second lender will. You might get the primary lender to agree to the short sale but have to offer some cash to the second lender to gain its blessing.
3. The longer the short sale timeline, the more costs accumulate on the loan. As costs rise, the ever-changing closing figures will reduce the amount of cash your lender will receive. At some point, the lender may reject the short sale simply because it isn't going to receive enough funds to make it worthwhile to approve the sale.
4. You might have to convince your agent to cut her commission. Your short sale lender may refuse to consent to the short sale unless your real estate agent and other parties to the transaction reduce or eliminate their fees.
5. Your credit will be damaged in a short sale. A short sale is a pretty significant piece of negative information to have on your credit history, but it's better than a foreclosure or a deed in lieu of foreclosure. How much better? It's tough to know how your credit history and credit score will be affected by a short sale, because it depends on how much other good or bad information is contained in your credit history.
6. Your lender may come after you down the road. In some states, if you go through a short sale or foreclosure, lenders have the right to pursue a deficiency judgment, a court order that makes you liable for the difference between the price the property sold for and what you owed on the mortgage. Second lenders who participate in HAMP, a program of the Making Home Affordable Program for short sellers, are not allowed to come after the homeowner, because these lenders receive cash from the government to release their claims. If you're truly destitute, it's unlikely the lender will come after you. But if you have other income, assets, or property, you must make sure that the lenders involved release you from all deficiency claims. Hire a real estate attorney to make sure that once you close on the transaction, nothing comes back to haunt you.
Deficiency Judgment
When you lose your home to foreclosure or are short funds in paying off a debt to your mortgage lender, your mortgage lender may attempt to collect on that difference. If the lender goes to court and sues you and wins, the lender is said to have obtained a deficiency judgment against you. With that deficiency judgment, the lender can go after any other assets you may have. For example, if you own a home that was worth $250,000 with a $225,000 mortgage debt on it and you default on the loan and the lender forecloses on the home and sells the home for $175,000, the lender is out $50,000. The lender may then go to the court and ask the court to give the lender a judgment against you for $50,000 which the lender can then use to go after any other assets you may have. That judgment would be the deficiency judgment. Some states do not allow deficiency judgments.
A interesting article from Washington Post....
By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, June 16, 2010
After the bank foreclosed on Fernando Palacios's Gainesville home in March, he thought he was done with what he described as the most stressful financial situation of his life.
The bank sold the home for far less than Palacios owed on it, as often happens with foreclosures. What Palacios did not see coming was the letter from his lender demanding that he pay the shortfall: $148,064.02. "I really thought I was through with this house," said Palacios, who fell behind on payments when the economy soured and his cleaning business stumbled.
Over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales, creating more grief for people who thought their real estate headaches were far behind.
In many localities -- including Virginia, Maryland and the District -- lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency.
Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.
Palacios said he was committed to staying in his house, which he bought in 2005. He sunk $20,000 into improving it and hoped to raise his children there. But his lender refused to modify his loan, he said. To avoid personal liability for the deficiency, Palacios is filing for bankruptcy protection, as many people do who are in similar situations, said Nancy Ryan, his bankruptcy attorney.
"I am definitely seeing more people come through my door who walked away from houses a year or two ago and thought they were as free as the dead," Ryan said. "They're stunned when they realize they're not."
Several lenders contacted for this story declined to say how often they pursue deficiencies. But many said they try to collect the debt if they conclude the borrower can repay all or part of it.
"Lenders are not going after people who face a hardship," said John Mechem, a spokesman for the Mortgage Bankers Association. "If they can't pay their mortgage because they have a loss of income, there is no point in going after them."
Those who had a second mortgage, such as a home-equity line of credit, in addition to their primary mortgage may find themselves particularly vulnerable, especially if they tapped into the equity line for cash.
Second lenders are last in line to get paid when a distressed property is sold. There's usually little or no money left over for them, making it more likely that they will pursue large deficiencies, several attorneys said.
Gretchen Somers said she and her husband understood the risks last year when they completed a "short sale," a transaction that allowed them to sell their Manassas home for about $150,000 less than they owed on it. But they felt they had no other options.
Somers said her family hung onto the house as long as possible. They tried but failed to sell it when her husband was transferred to Arizona for his job in early 2006, just as home prices were softening. They moved back into the house then tried to sell it again in 2008, after their adjustable-rate mortgage reset and their monthly mortgage payment nearly doubled. But home prices had plunged further by then, making it even tougher to sell.
Last year, their first lender and their home-equity line lender granted permission for the short sale. But the second lender reserved the right to come after the couple. Six months later, a collection agency called demanding $85,000 for related losses.
In hindsight, Somers said she and her husband should have just walked away from the house. "We took care of the house because we wanted it to sell," Somers said. "If they were going to come after us anyway, we shouldn't have done them the favor of making sure it looked good and cutting the grass even after we moved out, We should have mailed them the key and said: 'Here you go.' "
Carlos Cortez and his wife managed to escape that fate after their second lender came after them for $70,000 when their short sale was completed on his Manassas Park townhouse in 2008.
Cortez knew that was a possibility, but he went through with the sale because his real estate agent said the lender was engaging in scare tactics.
James Scruggs, an attorney at Legal Services of Northern Virginia, said the lender appears to have backed off after Cortez argued that that the loan officer falsely qualified him and his wife for a home-equity line by fabricating key details about their finances.
A handful of states do not allow lenders to pursue deficiencies, nor does a federal program that took effect April 10. Lenders participating in that initiative are paid for approving short sales and as a condition, they cannot go after outstanding debt.
In many states, lenders can go after deficiencies, though laws vary widely, said John Rao, an attorney at the National Consumer Law Center. Some states limit how long the banks have to file a claim or collect the debt. Others may calculate deficiencies based on the fair-market value of the house, Rao said. For instance, if a home sells for $200,000 yet its fair market value is $250,000, "the borrower who owes $240,000 on the mortgage would not have a deficiency," he said.
Borrowers should get a waiver in writing from their lenders to protect themselves, said Diane Cipollone, an attorney at the nonprofit Civil Justice. "Nobody should assume the deficiency is forgiven," she said.