I still owe money after a short sale

Many struggling homeowners have chosen to use a short sale as a way to get out of a mortgage they can no longer afford on a home that is valued below what they owe. It has been a blessing to many and has helped people avoid foreclosure proceedings. However, if the short sale is not successful, debt collectors may call former homeowners to claim the remaining loan balance.

Second mortgages or home equity lines of credit (HELOCs) are the main culprits in this scenario. Most short sales only cover the first mortgage. Second lien holders may collect $3-5000.00 from the sale, but often do not receive a dime. Later, after the short sale is complete, these lenders sell your bad debt to a collection agency and the calls start pouring in.

This can be avoided in most cases. When a homeowner is considering a short sale, he should immediately contact a real estate attorney. The attorney, when negotiating the final amount of the sale, may include a clause in the contract stating that the homeowner is not responsible for any further collection actions by the first or second mortgage holders after the sale. It is imperative that both parties are included in this clause to prevent future collection activity.

Many homeowners believed in the past that once the sale was complete, they were free and clear. This has not been the case. Collection activity begins almost a year after the sale and is non-stop. Without that clause in the contract, you are responsible for the remaining debt, especially with the holder of the second mortgage. These collection agents can aggressively pursue you, ruin your credit, and even take you to court for the amount you still owe. These collectors, of course, add their collection fees to the debt, making the debt larger and more difficult to pay.

Some states are still considered non-recourse states. What this means is that if a mortgage goes bad and a house is sold, the original borrower is not responsible for any difference in the loan amount. However, this no recourse rule does not apply to second mortgages in any state.

Borrowers should also be aware that many lenders have now resorted to including a promissory note in the contract. This note obligates the borrower to pay the remaining balance of their debt to the lender after the short sale has been completed. Many lenders claim that they will not approve a short sale without this guarantee. However, with proper representation from a real estate attorney, this pitfall can be avoided.

Homeowners already facing financial problems do not need this additional complaint. It is very important to have a clause in the short sale contract that releases you from liability for the loan balance.

Short selling has become a widely practiced form of real estate sales in the last two years due to the market. Most lenders don’t like the process and continually change their guidelines for the process. Real estate agents, even those who specialize in short sales, cannot keep up with all the different rules and regulations put in place by the many lenders. For this reason, it is crucial to have an attorney involved in the process.

Selling your home in a short sale can help you avoid foreclosure, but it is a very dangerous process for the homeowner if they are not prepared. If this is the course you need to take with your home, you need to arm yourself with a knowledgeable real estate agent and competent attorney.