A short sale is a great option for homeowners who can no longer afford their monthly payments-or who need to move, but owe more than their homes are worth. When the lender approves, a homeowner can sell for less than the remaining loan balance, and move on. But as many sellers discover, the debt isn’t always wiped out. In some cases, borrowers can still be held liable for the unpaid amount. This depends on several factors, including the type of loan, and pertinent state laws.
Recourse vs. Non-Recourse Loans generally fall into one of two categories: recourse and non-recourse. The holder of a recourse loan can go to court and obtain a deficiency judgment for the unpaid balance after a foreclosure or short sale. With the judgment in hand, the lender can take further action to collect. By contrast, the holder of a non-recourse loan can only collect from the proceeds of a sale–whether a foreclosure or a short sale. In single-action states, such as California, a lender that forecloses forfeits the right to further collection action, so a short sale is generally preferable.
Some states are considered non-recourse states. But laws on this topic are complicated, and usually make distinctions between the many different types of loans. So even in a non-recourse state, a particular loan might be a recourse loan.
This complex landscape can be intimidating for homeowner. But an experienced real estate agent can help you sort it out. One of the best features of a short sale is the opportunity to negotiate the disposition of the debt. Even if a lender has a right to pursue the deficiency, your agent may be able to persuade them not to, as part of the sale agreement. By contrast, if your home goes to foreclosure you have no control over the process, and are left to the mercy of the lender and the laws.
Help From Lawmakers In the housing debacle of recent years, a trend has emerged among lawmakers to protect homeowners and smooth the short sale process for those who need it. In California this led to passage in 2010 of SB 931, which prohibited first mortgage holders from pursuing borrowers for unpaid balances after these sales. But often, the thorniest problems come from junior liens such as second mortgages and home equity lines of credit (HELOC’s). These loans are usually recourse loans, and can quickly ruin transactions. So California followed the first law with SB 458, which extended the ban to junior liens.
As with most matters involving a lot of money, the short sale process is complex and calls for expert counsel. A qualified short sale agent can assess your situation and tell you how feasible it is for you. Best of all, the agent’s services are paid for out of the sale proceeds–which would otherwise go to the bank–so they cost you nothing.
In the midst of a dismal housing market, that’s a little piece of good news.