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Short Sale/Foreclosure Deficiency Judgments

Tamathy Solomon

Hello All!

A little bit today about going through the pain of foreclosure and whether you have any other “better” options. I’m still putting the final touches on my first newsletter. Stay tuned.

If you’re a seller trying to decide whether to let a home go through foreclosure versus attempting a short sale, salvaging your credit may not be an advantage to doing a short sale. According to “Score Factor Code #22, there’s no credit score advantage to a short sale over a foreclosure.” The only advantage is being able to buy another home within two years over the three- to five-year period required for foreclosures. But seek legal and tax advice before making that decision.

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The lender has sole discretion whether to pursue a deficiency judgment in those instances when the judgment is permitted. To determine whether a pending foreclosure or short sale is subject to a deficiency judgment, talk to a real estate lawyer.

The bad news is a seller could be subject to a deficiency judgment for the difference between the loan amount and the amount paid. In California, purchase money loans are not subject to deficiency judgments; however, hard money loans, equity loans and refinances are. Some other states have laws regarding personal guarantees, which could also result in a deficiency judgment, if the home owner is held personally liable for loan repayment.

You can’t just wake up one morning and decide you’re going to sell your home at a loss by asking for a short sale. It used to be that lenders wouldn’t even consider a short sale if your payments are current, but that has changed. However, realize that lenders will be more agreeable to negotiation if your payments are in arrears. Plus, if you have cash assets, the lender might try to tap those accounts.

Doing a short sale is not for the faint of heart.


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