Legal Pit Falls of Short Sales
Deficiencies and Loan Forgiveness
Negotiating a deficiency is at once the most critical and frequently overlooked aspects of completing a short sale. Considering the settlement of a deficiency requires legal analysis and specific language. It is no wonder this all-important aspect of a short sale negotiation is typically bypassed when anyone other than an attorney manages the negotiation. Sellers need a legal interpretation and a written analysis of their closing documents to ensure their interests are protected.
Experienced short sale attorneys negotiate for the release of both the property lien and the underlying personal debt secured by the note. Otherwise, the lender may not forgive the personal debt and begin collection activity. It should also be noted that current Federal loan forgiveness law does not grant all sellers loan forgiveness and does not relieve sellers from taxes levied in certain states.
Issues with Form Listing and Purchase and Sale Agreements
Realtor template-type form Listing and Purchase and Sale Agreements do not fully protect homeowners in short sale situations. Realtors are not licensed to modify the language in the contracts. Many escrow officers are not skilled or trained in creating closing documents that adhere to both the contracts and the terms and conditions of the short sale lender’s approval. This results in closing paperwork which is often deceptive and weighted heavily in the short sale lender’s favor.
Misrepresenting Tax Consequences
The federal government passed a law in 2007 directing the IRS not to include mortgage debt forgiven by a lender as income. This provision is limited and laws for mortgage debt forgiveness vary from state to state. If a Broker, Realtor or Agent who tells you there are, or will be, no tax consequences in a short sale, then I would run as fast and as far away from that person as possible. Only a qualified tax professional can determine tax consequences.
Misrepresenting How Secondary Debt Is Treated
One of the most common misrepresentations is that debt is forgiven once the primary lender approves a short sale. This is not always the case. Holders of second deeds of trust may not forgive the debt and may reserve the right to seek recompense at a later date. Rather than write off the entire debt, they may sell the balance to a collection agency that will aggressively pursue the borrower for payment. Many second loans may not be treated the same and a first mortgage. Sellers can be caught by surprise when a collection agency contacts them after their short sale closes seeking payment of the debt.
Lender Requests for Seller Contributions
Lenders may attempt to seek contributions from a seller in the form of a promissory note. In some states lenders do not have the right to seek certain funds from a seller. An agent who suggests or recommends a homeowner sign a promissory note when a homeowner would not otherwise be required to do so may be liable for negligence.
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