If you live in a 'deficiency' state and short sell your home, there is the possibility that you may still owe the mortgage debt.
Although recent legislation has shortened the time frame for a creditor to sue for the remaining balance, it is still important to understand the risks associated with a short sale if not negotiated correctly.
A 'deficiency' state or a 'recourse' state is a state where the laws allow a mortgage lender to retain the right to pursue a homeowner after a foreclosure for a deficiency judgment.
The power of a short sale not only keeps a struggling homeowner from losing his or her home to foreclosure but creates the opportunity to walk away from the mortgage debt and any deficiencies.
A deficiency is the balance owed to a lender under a secured loan after completion of a short sale of the property, and a deficiency judgment in Utah is the result of being sued by a lender for that amount, plus legal fees.
If a creditor is awarded the judgment, it possesses the ability to seek repayment through such things as a sheriff's sale, wage garnishing and wiping out bank accounts.
Needless to say, you do not want to give a creditor this power.
When it comes to a short sale in a deficiency state, unless specifically stated in the approval letter, the lender can still pursue the homeowner for the remaining mortgage debt.
The key to negotiating for a full release is to demonstrate to the mortgage lenders the inability for the homeowner to pay off any deficiency amount.
Mortgage lenders consider three factors when determining whether or not you are worth pursuing for the remaining balance: your hardship statement, your assets and your 'collectability'.
Your hardship Negotiators read your hardship statement very carefully, looking to determine if your inability to pay is by necessity or choice.
When you write you hardship letter, accuracy and disclosure are important.
Explain briefly the reason you can no longer afford your mortgage, letting them know you if your situation is short term or long term.
Tell them how you have been trying to maintain your mortgage payments.
Let them know if you considering filing for bankruptcy.
Expect to have your credit checked to see if you are paying your other debts.
If so, you may be regarded as 'strategically defaulting.
' Your assets If you disclose you have more than $5,000 in cash-- checking, savings, money market accounts-- your creditor or mortgage lender is more than likely going to ask you to contribute some of that money.
They cannot seize those accounts, but they will use that information as leverage.
Part of a short sale workout package is submitting 60 to 90 days worth of bank statements.
Keep this in mind as you put together your financial workout package.
Your collectability This has to do with how effectively your creditor believes he can collect on the debt you owe.
Are you employed? If so, are you a W2 employee? Do you receive income from any other sources such as rental income or retirement income? The more income you make, the greater the likelihood a lender is going to ask for you to contribute to a short sale.
Although short sales continue to provide the best opportunity to avoid a deficiency judgment, make sure you hire the right real estate short sale specialist who can effectively sell your home and negotiate for the release of the deficiency balance.
For information regarding Utah's legislation on deficiency collection limitations, visit ( http://le.
utah.
gov/~2012/bills/static/SB0042.
html )