Home Selling in Oakland>Question Details

Tina Ward, Home Buyer in Oakland, CA

If you Short Sale a property, are you responsible for the balance of the loan?

Asked by Tina Ward, Oakland, CA Tue Apr 20, 2010

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Not only are some loans nonrecourse loans, but the state can be a nonrecourse state as well. California is one of those states.

There was a waver from the government on paying taxes on the forgiven amount called The Mortgage Debt Relief Act of 2007 and runs until 2012. The act generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

The important thing with a short sale is to make sure that you have both of these issues covered in your shortsale package. It's best to consult with an attorney to be sure.
1 vote Thank Flag Link Tue Apr 20, 2010
You, as the buyer, are not responsible for the balance of the loans on a short sale.

However...there are some circumstances when a short sale lender (typically, the junion lien holder) will ask for more than what they will receive from the short sale.

Example:
First lender offers second lender 10% of the balance of the second loan. Say, $10,000.
Second lien holder balks, and asks for more, or they won't approve the short sale. They want $15,000.
Seller doesn't have any money to come up with the difference.
Buyer really likes the property. So Buyer offers to contribute the $5K short fall.
Everyone agrees, the lenders approve the deal, it's all there in black and white on the HUD (closing) statement.

In this case, this was a voluntary act on the part of the buyer, who, although he didn't have to, decided to contribute so that he can acquire the property.

It happens. So if you're in a situation like that, confer and strategize with your realtor. That small contribution may work out to your best advantage especially if you're buying the property at less than market value!

Good luck!
0 votes Thank Flag Link Wed Apr 21, 2010
Hi Tina:

In a short sale situation, your real estate agent should be trying to negotiate your best interests with the bank. In most cases, this will mean no deficiency judgment or payment by you. If it appears there may be one, you should talk to an attorney and consider backing out of the short sale. (BTW: This came up in another discussion here. If I remember correctly, it was pointed out that deficiency judgments are not allowed in California. Another reason to talk to a good local attorney!)

Best,
Ron Rovtar
Prudential Real Estate of the Rockies
Boulder, CO
303.473.1926
Web Reference: http://www.rovtar.com
0 votes Thank Flag Link Tue Apr 20, 2010
Hello Tina,

Having done numerous short sales, I have not encountered one instance where the borrower had to pay back the remaining balance. However, I can not state this is the norm...and the banks ARE getting more aggressive. Please make sure you are working with a knowledgable Realtor. Please feel free to call or email me anytime. Good luck.

Kamal Randhawa
Broker
510-932-1066
0 votes Thank Flag Link Tue Apr 20, 2010
As the first agent stated - look first to the loan - recourse or non-recourse. State law then dictates whether or not the bank can pursue the deficiency. I am sad to point out that the banks are getting very aggressive on this issue.
Good luck.
Michele Peters, Esq.
Web Reference: http://www.mpetersesq.com
0 votes Thank Flag Link Tue Apr 20, 2010
Tina,
Good question, the answer is possibly...not likely...could be...
There are a number of issues involved in a short sale. We have had many sellers sell with no I-9 (taxes on the difference) and no note. On others, primarily not Primary Residence. I-9 and a note for part of the difference became part of the deal to get the sale approved by the lender. You really need to talk to your lender. You may qualify for a loan modification, or you may be able to submit all of your financials and get a short sale approval. It is best to talk to your lender....you see...anything can happen.

Debbie Albert,PA
Coldwell Banker Residential
0 votes Thank Flag Link Tue Apr 20, 2010
Tina,
I'm sorry to hear that you may need to Short Sale your property. I would first like to offer you my wishes for a successful transaction.
I live & sell real estate in southern New Jersey; another area that has many Short Sale properties. I’m hoping that the same rules that apply here, would apply to your location since this is a continental issue. Unfortunately, I have some extensive experience in dealing with mortgage companies on the shortage from a sale. Here's what I've encountered in a nutshell..... It's up to your lender. Be sure to ask what they intend to do. They have several choices....
1) They can “forgive” your shortage and you'll owe them nothing more. HOWEVER, they may issue you a 1099 in the amount of the shortage in which you will owe income tax. Why? The IRS considers the "forgiveness" as income. Even though you don't receive any funds, it's considered a gift - more or less - and everyone is taxed on gifted money.
2) They may ask you to pay a portion of the shortage and "forgive" the rest.
3) Or, they may hold you completely accountable for the balance.
The only real advice to give you is to get a really good tax accountant who will review your tax/income situation, and a foreclosure attorney who will negotiate with bank/s while protecting your other assets.
Lastly, get an experienced Short Sale Realtor who can help facilitate this transaction, find you a qualified Buyer, and guide you through this emotional process.
Good luck in your endeavor!!! All the very best to you.
Barbara Jeffries, Realtor
Prudential Fox & Roach, Northfield, NJ 08225
609-646-4497
Barb@BarbaraJeffries.com
0 votes Thank Flag Link Tue Apr 20, 2010
Tina,
In short selling a property I would suggest that you be very careful that you have a clear agreement with all the lienholders. Some notes secured by your property might be "non-recourse" meaning that the lender cannot pursue your other assets after foreclosing. This is usually a loan used to purchase the property. Later loans that you added on, or if you refinanced your first loan, are typically "recourse" loans, and the lender can still come after your other assets after a foreclosure. The lenders, if they agree to the short sale, will provide you with an approval letter. Look at it very carefully and consider taking it to an attorney for review. That way you can be certain exactly what your rights and obligations are after the sale.
I have done a few of these and they can be rather tricky. Let me know if you would like to discuss the specifics of your situation with me privately.

ARTHUR G. WHITE, SRES, LL.B.
Licensed Real Estate Broker, Realtor®
Red Oak Realty
Cal. DRE Lic. #01273793
http://www.artwhite.com
e-mail: art@artwhite.com
0 votes Thank Flag Link Tue Apr 20, 2010
Your profile says home buyer, if your the buyer for a property that is a short sale you are not responsible for the balance of the sellers loan.

Thanks
0 votes Thank Flag Link Tue Apr 20, 2010
While undertaking a Short Sale you have to ask your agent to ask the bank to forgive the loan.
It all depends on whether your property is a rental or principal residence, how much you make in income, your loan amount you are defaulting on, and your savings in the bank and 401K. It is prudent to write a true and accurate hardship letter. It also depends whether it is the first loan or a Home Equity loan.

Also check the HAFA program the details are at:

https://www.hmpadmin.com/portal/docs/hamp_servicer/sd0909.pdf

It will also be prudent to talk to a CPA or Bankruptcy Lawyer.

Best Regards
Perry
Web Reference: http://www.ruthandperry.com
0 votes Thank Flag Link Tue Apr 20, 2010
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