Foreclosure Defense and Short Sale Guidance
A short sale or deed in lieu maybe a viable option to avoid foreclosure and a deficiency defiiency judgement.
Many homeowners facing foreclosure determine that they just can't afford to stay in their home. If you plan to give up your home but want to avoid a foreclosure (including some of the negative blemish it will cause on your credit report), consider a short sale or a deed in lieu of foreclosure. These options allow you to sell or walk away from your home without incurring liability for a "deficiency."
To learn about deficiencies, how short sales and deeds in lieu can help, and the advantages and disadvantages of each, read on. (To learn more about foreclosure, including other options to avoid it, see our Foreclosure area.)
In Florida, lenders can sue homeowners even after the house is foreclosed on or sold, to recover for any remaining deficiency. A deficiency occurs when the amount you owe on the home loan is more than the proceeds from the sale (or auction) -- the difference between these two amounts is the amount of the deficiency.
In a "short sale" you get permission from the lender to sell your house for an amount that will not cover your loan (the sale price falls "short" of the amount you owe the lender). A short sale is beneficial if you live in a state that allows lenders to sue for a deficiency -- but only if you get your lender to agree (in writing) to let you off the hook.
If you live in a state that doesn't allow a lender to sue you for a deficiency, you don't need to arrange for a short sale. If the sale proceeds fall short of your loan, the lender can't do anything about it. Unfortunately, here in Florida the lender can pursue you for a deficiency. In fact, many people are mislead by real estate agents to believe that a short sale will solve your mortgage problems. While this is possible, it is not a guarantee. You should speak to our attorney to understand your options and determine if a short sale is right for you.
How will a short sale help? The main benefit of a short sale is that you get out from under your mortgage without liability for the deficiency. You also avoid having a foreclosure or a bankruptcy on your credit record. The general thinking is that your credit won't suffer as much as it would were you to let the foreclosure proceed or file for bankruptcy.
What are the drawbacks? You've got to have a bona fide offer from a buyer before you can find out whether or not the lender will go along with it. In a market where sales are hard to come by, this can be frustrating because you won't know in advance what the lender is willing to settle for.
What if you have more than one loan? If you have a second or third mortgage (or home equity loan or line of credit), those lenders must also agree to the short sale. Unfortunately, this is often impossible since those lenders won't stand to gain anything from the short sale.
Beware of tax consequences. A short sale may generate an unwelcome surprise: Taxable income based on the amount the sale proceeds are short of what you owe (again, called the "deficiency"). The IRS treats forgiven debt as taxable income, subject to regular income tax.
Deed in Lieu of Foreclosure
With a deed in lieu of foreclosure, you give your home to the lender (the "deed") in exchange for the lender canceling the loan. The lender promises not to initiate foreclosure proceedings, and to terminate any existing foreclosure proceedings. Be sure that the lender agrees, in writing, to forgive any deficiency (the amount of the loan that isn't covered by the sale proceeds) that remains after the house is sold.
Before the lender will accept a deed in lieu of foreclosure, it will probably require you to put your home on the market for a period of time (three months is typical). Banks would rather have you sell the house than have to sell it themselves.