Are Short Sales a False Sense of Security?

With the rise of falling home prices, home owners who have run into unforeseen circumstances, like unemployment, medical issues or divorce and can no longer sell their homes for what they owe.

As a result, short sales have become obligatory as opposed to foreclosure. But what becomes of the deficiencies?

After the banks foreclose or you decide to short sell, it's very common now to have large deficiencies with houses not worth the balances owed so banks have began to go after the borrowers and pursue a deficiency judgment.

Are You on the Hook for a Deficiency Judgment?

Whether banks pursue a deficiency judgment against the homeowner depends on many factors, including what state the borrower lives in and whether there's a second mortgage or other liens on the home. But keep in mind, once the bank gets a judgment against you they can pursue you anywhere.

Generally, a mortgage has two parts: a pledge of collateral, represented by the home, and a promise to pay off the loan.
Lenders may release property liens in order to facilitate short sales without releasing borrowers from their obligations to pay under the promissory notes.

Lenders can pursue mortgage deficiencies in most states, however some states are non-recourse and don't allow deficiency judgments. But, even then, if the original loan was refinanced, some or all of it may still be subject to claims. In many cases, extinguishing the debt is often a matter of negotiating with the bank.

There are many lenders willing to release borrowers from further obligations but many borrowers are unaware that they have to ask for this type of release. So, if you are pursuing a short sale, be sure your attorney or realtor asks the bank to release you from any further obligation and get it in writing.

Will they or Won’t they file for a Judgment?

Many home owners feel they can finally breathe after a short sale or foreclosure; believing the worst is over. But judgments don't have to be obtained immediately; with so many unfortunate cases lenders are really overwhelmed so it’s taking them longer to reconcile accounts. They also may wait until they believe the debtors have recovered financially before they swoop in to recover whatever funds they can.

Once the court grants a judgment, the lender may have anywhere up to 10 or 20 years to collect, with interest.

Before agreeing and signing on the dotted line make sure all past and future liabilities are covered in your agreement.