Read the fine print in a short sale

TAMPA, Fla. – Feb. 23, 2010 – With so many distressed homeowners owing more than their homes are worth, short sales have become lifelines.

These types of sales make up more than half of the homes on the market in the Tampa Bay area. Generally, this means the mortgage lender has agreed to allow the home to sell for market value. The lender writes off the rest of the debt, and the homeowner walks away.

But is it really this simple?

Lenders are increasingly adding language to the approval package, reserving the right to pursue the deficiency later – that is, the difference between what you owed on the house and what it sold for.

Some homeowners, so anxious to get out of a pending foreclosure, skip right over that part of the letter. Some understand but opt to take their chances, betting they won’t hear from the lender again.

For some lucky buyers, this has been the case – so far. They’ve sold their home as a short sale, moved on, and haven’t had any problems. But other lenders require the seller to agree upfront to pay back a set amount.

‘It seems fair’

Realtor Paul De La Torre, of Keller Williams, said lenders almost always ask his clients to agree to pay at least some of the debt back. Lenders’ requests, he said, range from 15 percent of the balance to agreeing to a payment plan – such as $80 a month for 15 years.

“It’s seems fair,” De La Torre said. “Some of these people are walking away from a huge amount. More folks need to consider it could be much worse if the lender comes back for the full deficiency later.”

Lenders don’t always go after short sale homeowners. But in Florida, lenders can wait up to five years to file for a court judgment to make the borrower pay. After the judgment is granted, the lender has 20 years to collect the cash.

This is particularly frightening because lenders could wait until the debtor is back on their feet to act. The homeowner could recover financially only to discover years later that they owe the bank tens of thousands of dollars.

Insurance companies

De La Torre said homeowners are even more likely to be required to pay a deficiency if they have mortgage insurance. (Borrowers who have less than 20 percent equity in their homes typically are required by their lenders to cover this insurance in case they default.)

Mortgage insurance companies “are getting pretty strict about short sales,” he said. “They have to sign off on the short sale, too, and many are not only asking for promissory notes but are ordering their own appraisals.”

Deficiency judgments aren’t only a problem in short sale cases. They can happen following a foreclosure, too.

A lender can take back the home, sell it and then come back after the borrower for the difference between that amount and the balance on the old mortgage. This is allowed in Florida and most other states.

So what can a homeowner do?

Not much, in the case of a foreclosure. But when negotiating a short sale, the homeowner must sign off on the paperwork, too, said Jim Davis, a real estate agent with Century 21 A&M Realty.

Borrowers can ask to be released from the debt, and sometimes that works. In the past three to six months, though, Davis said he’s seen many lenders require some form of payment.

That’s where negotiation can kick in.

Some lenders detail how much money they might come after later. Others don’t specify, and that may mean the full amount. Davis recommends anyone signing a short sale agreement insist the lenders be specific about deficiency plans. Read the fine print, he said, and ask lots of questions.

If they don’t, it may haunt them later.

Copyright © 2010 Tampa Tribune, Fla