Can a Seller Be Forced to Pay Back the Balance on a Short Sale?
If thinking about asking a lender to approve a short sale, a homeowner should make sure she knows all of the potential disadvantages. That includes discovering if the lender might charge her for the deficit that occurs due to this type of real estate transaction. If so, when the homeowner sells and moves from the home, she may still end up with an unsecured debt to pay.
Other People Are Reading
-
Description of a Short Sale
-
A short sale is an action that a home seller takes to sell his house even when the market value is less than his current mortgage balance. The market value is the amount that a willing buyer offers for the property. So for instance, say the seller has a buyer offering to pay $250,000 for the home, but the seller' s current mortgage balance is $260,000. Under normal circumstances, the lender won't allow the transaction to occur due to the deficit of $10,000. But when a lender allows a short sale, the seller can proceed with the transaction at the buyer's offered price.
What About the Balance?
-
Just because the lender allows the short sale does not necessarily mean that the lender forgives the remaining balance. In some cases, the lender may waive the balance, but in other cases the lender may require the seller to cover the deficit (sometimes called a "deficiency balance"). In other cases, the lender asks for the balance from the home seller at closing of the sales transaction. In still other cases, the lender creates a new loan account for the seller to pay down the remaining balance or simply sends a bill for the amount due. The initial mortgage agreement may provide specific guidance regarding how the lender will handle a deficiency balance.
-
Suggestions
-
Before a homeowner agrees to a short sale, it is important that she knows in advance exactly what the lender plans to do. She should also get the exact terms in writing. If the lender plans to convert the balance after the short sale into a new loan, the seller should find out the interest rate (i.e., whether it is the same as the current mortgage loan), length of the new loan in months and estimated payments. A homeowner considering a short sale should talk to a lawyer or credit counselor before making a final decision.
Possible Alternative
-
To avoid a short sale, the homeowner might choose to keep the home and rent it out to someone instead (if the mortgage agreement allows). This allows the homeowner to move on to a new residence while covering all or most of the mortgage payment. But renting the home comes with risks. For instance, the home could continue to decline in value during the rental, or the tenant could fail to meet the terms of his lease. The homeowner also must stay current on payments until he finds a qualified tenant.
-
