Homeowners beware of Short Sale

If you thought that losing your home to foreclosure was behind you? Beware of the Short Sale.

You may still be liable for the difference between what you owe on your mortgage and what the bank can sell the property for at auction. The bank may still be able to come back at you using a deficiency judgment. A deficiency judgment can be used even on those homeowners who sold their home for less than it was worth and the bank agreed to the sale.

Vanessa Cory, from Fredericksburg, Virginia for example sold her home on Short Sale back in April of 2008. The Cory’s built the home in 2004 and due to setback’s including divorce and professional setbacks made it impossible for the real estate agent to keep her home. Ms. Cory went into negotiations to process a Short Sale and a Short Sale was conducted on her property. Ms. Cory believed that was the end of her obligation. She believed the deficiency was negotiated away until she received a letter from a lawyer from her previous lender in November of this year. The letter stated that she owed the lending institution sixty five thousand dollars. Ms. Cory had no alterative other than to declare bankruptcy as she could not pay the deficiency judgment against her.

Ms. Cory is not the only homeowner in this situation. Former homeowners who obtained larger loan than they could afford; liar loans that didn’t require verification of income or those who could afford but unemployment or other unforeseen circumstances placed them into the situation they are in are feeling the pains of foreclosure. The result of over stated appraised values of properties has made it impossible for distressed homeowners to recover and thus brought them to foreclosures and short sales which in most cases result in deficiencies upon sale.

The lending institutions after the foreclosure are often selling the properties for less than what was owed on the mortgage resulting in the deficiency. The lending institutions seeking to clear the deficiencies off the books are seeking legal action against the former homeowner.

The determination of whether a lending institution will seek to pursue a deficiency judgment against the former homeowner depends on several factors. The factors include the state you are in, if there are second liens on the property or second mortgages.

Richard Zaretsky, a board certified real estate attorney in Florida stated that once the lending institutions have a judgment against you they can pursue you anywhere. The lending institutions can have your wages garnished and if you fail to respond to the judgment a judge can issue a warrant for your arrest. A lender can pursue deficiencies in thirty states after a foreclosure. California has a non-recourse and does not allow for deficiency judgments but if the original loan was refinanced some or all of it may be subject to claims.

Deficiency judgments on short sales and deed-in-lieu happen most often. The deficiency is a matter of negotiating with the bank at the time to release the homeowner from any deficiency resulting from the short sale or deed-in-lieu.

Homeowners in most cases are not aware that they must ask the lender for a release when pursuing a short sale. Short sales tend to give the homeowner a false sense of security as most don’t know that the lending institution is able to come back at them for the difference.

Mortgage industry professionals believe that over the next several years lending institutions will seek to pursue more of these deficiencies as many lending institutions have sold off accounts to collection agencies and other third parties at discounts. The third parties that purchase these notes didn’t purchase them without the intention of obtaining or seeking to obtain the deficiency involved.

If anything is to be learned here it’s be aware of what your rights are. Find out what your options are when it comes to foreclosures and short sale.