If you're facing a foreclosure, a short sale might sound like the perfect solution to your mortgage payment problems. With a short sale, you sell your home for less than the total debt balance remaining on the mortgage, and the lender agrees to release its lien on the property. Once the short sale is complete, you're free and clear of the home. What could be easier? Well, many different potential hurdles could emerge that you'll have to overcome to complete the deal and, sometimes, even after selling your property.
While you can complete a short sale without an attorney, it's often a good idea to hire one to represent you in the transaction. Lawyers are trained negotiators who can push the deal through and, in many cases, help you avoid a deficiency judgment after the sale. A lawyer will take steps to resolve conflicts and minimize the number of snags in the process.
Completing a short sale is one way to avoid a foreclosure if you're behind in your mortgage payments. In a short sale, you sell your home and for less than the outstanding mortgage balance. The lender agrees to accept the proceeds from the sale in exchange for releasing the lien on the property even though the amount is "short" of paying off the debt.
Example. Say you owe $400,000 on your mortgage. Your lender agrees to let you sell the property for $350,000 and release its lien. The sale price is "short" of the full debt amount by $50,000, which is called a "deficiency."
In many states, the lender can seek a personal judgment against the borrower after a short sale to recover the deficiency amount. Generally, once the lender gets a deficiency judgment, it may collect this amount—in our example above, $50,000—from the borrower using standard collection methods, like garnishing wages or levying your bank account.
During the mortgage crisis, short sales were difficult, if not impossible, to complete because of the overwhelming number of people requesting one. Now, however, servicers and lenders have revamped their short sale guidelines, and the process is easier and more efficient. Though, it can still take a few weeks or months to wrap up a short sale. And problems tend to pop up in these transactions.
If you're aware of the most common short sale problems, you'll be better prepared to deal with them as they come up. And if you need help dealing with arising issues, or want to try to avoid them in the first place, consider hiring a lawyer to help you navigate the process.
The first task in getting a short sale is to convince your lender to agree to release its mortgage lien in exchange for receiving the proceeds from the sale. But lenders don't especially like short sales. They'd much rather get paid in full; banks owe their shareholders and investors a duty to get as much as they can for distressed properties.
And, potential purchasers sometimes make ridiculously low offers hoping to get an amazing deal on your property. Lowball offers don't meet investor guidelines, and the lender will likely come back with a significantly higher counteroffer. Because the lender might reject the first offer—especially if it's substantially lower than the listing price or below fair market value—uninformed buyers and sellers who expect a quick turnaround can get frustrated and bail on the deal before the sale is approved.
Most lenders will, however, reluctantly approve a short sale under some circumstances. A lawyer can evaluate all of the factors that the lender will consider in deciding whether to approve the short sale—including your hardship, your assets and income, the appraised value of the home, and the adequacy of an offer—and present them in the best light possible to try to convince the lender to more readily agree to a short sale.
Although the lender might agree to release its mortgage lien in exchange for the short sale proceeds, it might not release you from personal liability on the debt. So, if state law allows it, the lender could potentially come after you for the deficiency. Again, in many states, the lender can seek a personal judgment against you after the short sale to recover the deficiency amount. To avoid any nasty surprises following the short sale, you should figure out what will happen to the deficiency before completing the transaction.
If your state doesn't have a statute that prohibits a deficiency judgment following a short sale, you might be able to prevent the lender from getting one by negotiating a waiver of the deficiency. But if you have sufficient income or assets, the lender might expect you to bring the cash to the closing to cover part of the deficiency amount. For example, say the lender will approve the short sale, but only if you agree to sign a $10,000 promissory note to cover some of the deficiency.
Even if the lender doesn't require you to bring cash to the closing, if your short sale agreement with the lender isn't worded correctly, in most cases, the lender may pursue you for a deficiency judgment after the sale. To avoid a deficiency judgment, the short sale agreement must expressly state that the lender waives its right to the deficiency. A lawyer can help negotiate a waiver of the deficiency and ensure this language is part of the written agreement.
You might also be able to avoid a deficiency judgment by declaring bankruptcy or negotiating to contribute less than the lender is requesting. Rather than signing a $10,000 promissory note, you could offer to pay $3,000 at closing. Lenders sometimes prefer to take less money at closing instead of trying to get more money out of you later on. A lawyer can handle the negotiations on your behalf. A bankruptcy attorney can give you advice about whether bankruptcy is right for your situation.
Any junior lienholders have to agree to the short sale. So, the negotiations might also include any other mortgage lenders, like second-mortgage holders and HELOC lenders, homeowners' associations, and judgment creditors.
To get the junior lienholders to agree, the first mortgage holder will offer each one a portion of the total amount they're owed—usually a small amount of money—to release their lien. Some banks and other entities have a reputation for being difficult when it comes to releasing junior liens. If you don't devote adequate time and attention to each junior lienholder initially, you might run out of time to get their consent and complete the short sale. Good short sale lawyers are skilled negotiators and are experienced in successfully organizing the entire transaction, as well as handling all parties involved.
One common reason that short sales fail to close is problems with the documentation. For example, the documents might not get drawn up in time, be missing, or not be signed and dated correctly.
Short sale transactions require a lot of paperwork, and most people don't fully understand the legal consequences of all of the documents. A lawyer can give you legal advice about the transaction. For example, once the lender approves the short sale, you'll get an approval letter that contains the terms of the agreement. A competent attorney can provide you with a legal interpretation of this agreement and advise you about its legal effect.
Any problems with the documentation can slow the process down or kill the deal altogether. So, it's in your best interest to push for the loan documents to be prepared several days before the closing date and to carefully review them.
Whether you should hire a lawyer ultimately depends on your personal circumstances. In the end, even if you decide not to hire a lawyer to facilitate your short sale, it could be worthwhile to pay for a consultation with a qualified attorney who can answer any questions you have on this topic. Short sales can be tricky, so be sure your attorney is familiar with how they work.