Selling your home “short”… What does this mean and why would you want to consider it?
When homeowners sell a home “short”, they are asking the lender to agree to the sale even though they will not be paid the total amount of the mortgage.
The common Scenario:
Home purchased in 2006 for $480,000.00. The first mortgage amount is $370,000 and a second for $85,000.00. The house is now worth $320,000.00. A buyer exists who wants to purchase the home for about $320,000.00. If the lenders that hold the first and second mortgages agree to the sale, they will be paid less than they are owed.
In theory, this sounds great for the homeowner. He or she can avoid the foreclosure stigma and all its hassles and move on with life more quickly.
The question is then, why would the seller who is considering a bankruptcy, want to be careful about doing it?
1. From a debt liability standpoint, it may be unnecessary.
In the scenario above, both the first and second mortgage holders will lose money. Normally, they could sue the homeowner for the deficiency balance either after a foreclosure sale or after a short sale anyway.
However, Arizona state law prohibits the collection of the deficiency balance on a residence in most instances, especially where the loans are “purchase money” and a foreclosure would be “non judicial”. Further, the lenders may agree in writing, not to sue on the deficiency.
If they don’t waive that right, or if it is otherwise collectible, then bankruptcy may be the best way to deal with it. Especially, if bankruptcy was going to be used anyway, to deal with all issues at once.
So, if the sole purpose of the short sale is to avoid a deficiency based collection action, be careful.
2. It may damage credit.
If you don’t pay or breach the contract, the lender will report it to the credit bureaus. Some say that the effect on the report is as bad as or worse than foreclosure or bankruptcy.