A short sale is a bank-approved sale of a home when a mortgage borrower is at risk of foreclosure and the sale won’t generate the equity they need to fully satisfy their mortgage. The remaining debt after a short sale is known as a deficiency, and lenders can either waive it or continue to hold the borrower liable for all or a portion of it.
Short sales must be approved by the bank that issued the loan because these transactions occur at their loss. For example, if a homeowner has a $1 million mortgage but can only sell the home for $950,000, the bank would be short a $50,000 deficiency.
Although lenders lose money on short sales, they might be willing to consider one when its potential loss is less than the cost of pursuing foreclosure and/or the borrower declaring bankruptcy. In the end, lenders tend to prefer recovering as much of their investment as possible, however possible.
How Does a Borrower Benefit from a Short Sale?
Mortgage borrowers benefit from short sales because they’re a way to get out from underneath an unaffordable mortgage without declaring bankruptcy or foreclosure. The latter two options represent more extreme financial situations that most borrowers hope to avoid.
A dream home can quickly morph into a nightmare when its mortgage becomes unaffordable. This can happen to anyone, especially during a recession or times of financial hardship spurred by job loss or unexpected debt. Homeowners seeking relief can settle their mortgage for less than its full value with a short sale, although it does mean sacrificing the roof above their heads in the end.
Short Sale Deficiencies
As previously mentioned, the short sale deficiency is the amount left over on the mortgage after the short sale concludes. In other words, this is the money the bank loses on its investment in someone’s mortgage.
You might wonder if you could be left on the hook for the rest of your mortgage after a short sale. Although this is possible after a foreclosure sale, California law prohibits deficiency judgments after short sales.
Once your short sale concludes and your bank receives the proceeds from the sale, it must release the mortgage lien.
Will a Short Sale Affect My Credit?
A short sale can damage your credit score, but its impact may not be as severe as foreclosure or bankruptcy could be. You can also have trouble finding a new mortgage for a year or two, but again, foreclosure and bankruptcy can make it harder to find a willing lender – and for longer.
We Can Help with Short Sales
If you’re having trouble affording your mortgage and want to look for a way out, a short sale might help. The Nguyen Law Group has the experience and skill necessary to represent clients in short sales, from helping them draft short sale proposal letters to engaging in negotiations with their lenders.
Take advantage of our free initial consultation to find out how Nguyen Law Group can provide the legal support you need for a short sale.