Can I just walk away?

So, what is a short sale? Can I just walk away?

Short sales are not new. For as long as there has been lending, lenders have sometimes agreed to take less than what is owed to satisfy a loan.

A short sale in today’s mortgage crisis is when a lender agrees to take a pay off of less than what is owed on the mortgage for the property. They are accepting a “short” pay off, thus the term “short sale.” It will take several posts to cover the details of short sales, but I want to start today with a few definitions.

First, when you purchase a home with a loan, there are 2 parts to the loan – a note and a mortgage. By contrast, when you purchase a car, you only have a note. What is the difference? When you buy a car, the bank holds the title until you actually pay off the loan – right? You don’t actually own the car, the bank does, until they get all of their money. This is their collateral or security for your loan. If you do not pay, they come and get THEIR car!

But, when you buy a home, you actually own it. The title is in your name. If you stop paying, the bank can’t just show up one day, place your home on a truck and haul it away. They must go through due process of the law to foreclose your interest in the property, or to terminate your ownership before they can repossess it. You see, you have both a note which is the document setting out the terms of the loan (just like a car loan), and a mortgage (unlike a car loan) which is a separate document pledging your home as security interest for the loan. The mortgage explains what happens if you default on the note. It is what gives the lender the right to repossess your home, but only after going through the foreclosure process.

Each state has laws and regulations that lenders must follow in order to foreclose against your ownership. They also have rules that apply AFTER they foreclose. It’s not over when you think it’s over!

So what happens with the balance of the loan – does it evaporate? After foreclosure, the lender will usually sell the property. The balance of the loan and all fees, after the lender has re-sold the property is called a deficiency. In most states, including Florida, the lender can then go back to the court, show what the shortfall is, and get a deficiency judgment against the homeowner. The homeowner is still liable for the debt because even though the mortgage was foreclosed, the note – or promise to pay – is still there! THEY HAVE UP TO 20 YEARS TO CLAIM THIS DEBT!           

There are programs and ways to protect you. We will be discussing many of these over the next several posts, including buzz words like HAFA, HAMP, Loan Modifications, Short Sales, and Deed in Lieu.

Feel free to post any questions you have and I will try to get them answered in the next post.

Peace,

Chuck

If you know anyone struggling with mortgage payments, we can provide solutions for homeowners facing market hardships.