SHORT SALES VS. FORECLOSURE When You’re Behind on Mortgage Payments Understand All of the Options Available to You So You Can Make Smart, Informed Choices
BRIAN V LEE
BANKRUPTCY ATTORNEY IN WASHINGTON DC AND VIRGINIA
A mortgage loan is a secured loan, which means that the home acts as collateral to guarantee the debt. If the mortgage loan is not paid in full and on time as required by the loan terms, the lender can take the house back, sell the home and use the money from the sale to repay the mortgage (with the homeowner getting any excess money left after the mortgage balance and bank fees are paid). The process of a bank taking a home is called foreclosure and it can have devastating affects on a homeowner. As such, it is often advisable for the homeowner who cannot pay to consider a short sale as an alternative to foreclosure.
Foreclosures can be originated by mortgage lenders when you are late on mortgage payments, but you may be able to stop a foreclosure through bankruptcy or by exploring mortgage modification alternatives.
Individuals who are unable to pay the mortgage on their home need to understand all of the options available to them and must make smart, informed choices about how best to proceed. An experienced debt relief and bankruptcy attorney can provide invaluable advice to homeowners who are going to lose their homes.
SHORT SALES VS. FORECLOSURE Foreclosure is a legal process whereby a mortgage lender takes a home due to non-payment. Typically, after a homeowner has fallen behind on mortgage payments, the bank will send a default notice
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and will try to pursue payment of the past-due bill as well as late fees. If the homeowner continues not to pay the mortgage, then the lender can send a notice of default and the foreclosure process will move forward. The specifics of how foreclosures occur vary by state. In many locations, a non-judicial foreclosure process is used. This process is possible in states that permit non-judicial foreclosure and there is a provision in the mortgage loan documents allowing the bank to exercise this option. In a non-judicial foreclosure, the bank must provide sufficient notice and advertise the sale of the home but is not required to go to court to prove default and get an order foreclosing on the home. In other states, a judicial foreclosure is the only option. A judicial foreclosure means a lender must prove default to a judge and get a court order foreclosing on the home. Both a judicial foreclosure and a non-judicial foreclosure result in public notification that the home is being foreclosed on and sold. The homeowner’s credit will also be severely damaged as a result of the foreclosure on his or her credit report. This can make it very difficult for the homeowner to get a loan, a mortgage in the future or a credit card. It may also make it difficult for the individual to find a landlord
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willing to rent to him/her due to the history of foreclosure and poor credit score. While damage to a homeowner’s credit score is one severe consequence of foreclosure, it may not be the worst outcome. Some states permit deficiency judgments, which means that a bank can pursue an additional legal claim against the homeowner if the foreclosure does not generate enough money to pay off the loan and costs in full. If a homeowner owed $200,000, for example, and the sale of the foreclosed home netted only $160,000, then the lender could pursue a deficiency judgment for $40,000. When the court orders the debtor homeowner to pay this unpaid debt, the lender could place a lien on other property or could pursue an order to garnish the debtor’s wages. A short sale, on the other hand, operates differently from a foreclosure. Instead of the lender taking the home, the homeowner arranges the sale of the home to a buyer. However, the sale of the home is for less than the outstanding loan balance. Typically, a homeowner cannot sell a home for less than he or she owes on it unless the homeowner has the cash to bring to closing to make up for the difference. A short sale can allow a homeowner to sell the house for
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less than the amount due and the lender agrees to accept that payment from the purchaser as satisfaction of the debt. A short sale can do far less damage to the credit of the homeowner, although is or her credit score likely still will be affected and will decline due to the short sale. It is also possible to negotiate with the lender to ensure that no deficiency judgment will be pursued if the home is sold in a short sale. This ensures that the debtor homeowner can walk away from the closing and sale of the home with no further obligation to repay any outstanding balance associated with the home mortgage loan. Short sales are generally far preferable to foreclosure for the debtor and lenders are often willing to agree to a short sale because this option avoids the costs and complexities of foreclosing on a home. However, the homeowner will need to find a buyer with a reasonable offer and the lender will need to agree to the short sale for this option to work. An experienced bankruptcy and debt relief lawyer can help those who are facing foreclosure to work with lenders to pursue a short sale as an alternative to the lender foreclosing on the debtor’s home.
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About the Author Brian V. Lee Serving clients in the DC-metropolitan area since 2005, attorney Brian V. Lee is licensed in Virginia and the District of Columbia. He is also licensed to practice in Maryland federal and bankruptcy courts. Brian provides client-oriented legal counsel to businesses and individuals on a wide variety of complex legal and financial issues. He is a graduate of Rutgers University in New Jersey and George Mason University School of Law. About Lee Legal Lee Legal is a full service bankruptcy and litigation law firm with offices located in Washington, D.C. (DuPont Circle) and Virginia (Old Town Alexandria). Lee Legal provides skilled, comprehensive bankruptcy and litigation representation. Every client receives a free initial consultation. National Association of Consumer Bankruptcy AttorneysLee Legal is a proud member of the National Association of Consumer Bankruptcy Attorneys, a national advocacy organization dedicated to the protection of the rights of consumer debtors in bankruptcy. Lee Legal is also rated by the Lead Counsel Program, designed to assist consumers in finding a pre-qualified, pre-screened attorney quickly and easily. Lead Counsel Members must pass a challenging certification process, which mandates peer recommendations, bar checks, and practice area experience. If you are facing financial difficulty or litigation, call (703) 879-2870 in Virginia or (202) 448-5136 in Washington, D.C. for a free consultation.
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