Do Borrowers Owe Short Sale Differences?
Short sale payoffs have increased in popularity since the recession and housing crisis began in 2007. The sales transactions in which proceeds fall short of the amount owed on the mortgage, were on the rise as of 2011, according to the National Association of Realtors. Usually the result of housing slumps, short sales proliferate when reduced home values meet financial hardship. Borrowers who choose to short sell may owe some the difference under certain circumstances.
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The Basics
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A short sale is contingent upon lender acceptance of the sales contract price and terms. Because more than one loan may encumber a home, as is the case when second mortgages and home equity lines of credit are take out by the borrower, a house may be severely upside-down in equity. Borrowers in negative-equity positions require approval from all lenders with lien ties to the home, in a short sale. They are more likely to owe the difference, or a portion of it, to the lender if the loans were obtained through refinance or originated in recourse states.
Purchase-Money Loan
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Some borrowers obtain at least one purchase-money loan to buy a home. In short sale situations, these initial loans used to acquire a primary residence can be forgiven by the lender. They write off as a loss the difference between the sale's proceeds and what was owed. Purchase-money loans are generally not owed after a short sale if the home is in a non-recourse state, such as California or Arizona. However, a lender may hold a borrower personally liable for a deficiency in recourse states, such as Utah and Michigan.
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Non Purchase-Money
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A non purchase-money loan is one obtained after purchase, through refinance of a first or junior lien, or by taking out another debt secured by the home, such as an equity line. These loans are used to pay off the home's existing mortgage and may provide the borrower with extra funds for personal use. A lender can sue a non purchase-money borrower for the difference in recourse and non-recourse states. In cases where the lender agrees to a short sale on non purchase money, the borrower may have to sign a promissory note for a portion of the difference as a condition for approval.
Exceptions
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In 2010, the Home Affordable Foreclosure Alternative program streamlined the short sale process and rules among lenders to help thwart the rise of foreclosures. The measure, which is scheduled to last through 2012, applies to mortgages originated before January 1, 2009. Under the provisions, lenders must agree not to pursue a borrower after short sale, as long as they meet all eligibility guidelines for income, hardship and real estate secured as outlined in the servicing handbook. Home Affordable Foreclosure Alternative is a federal program, and lender participation is voluntary.
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References
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