1. If a property is foreclosed upon, borrower is released of all debt.
Borrower is only released of the debt if lender forecloses via advertisement. If lender forecloses via litigation, then borrower is still responsible for the debt. If there is a second or third mortgage, borrower is still responsible for those even after end of redemption period.
2. After the sheriff sale, the second mortgage is gone.
The second mortgage still has a lien on the property after the sheriff sale. The 2nd mortgage lien only goes away at the end of the redemption period. Therefore, if seller is redeeming from sheriff on foreclosing mortgage in a short sale, any other mortgage holder is entitled to the proceeds and must be negotiated for release of lien via short sale.
3. If a borrower has filed bankruptcy, the second mortgage “goes away”.
Even if the debt on all mortgages on the property were included in the bankruptcy, it is only the borrower’s obligation under the note that is forgiven. The lender(s) still hold their lien on the property and must be negotiated and/or settled to obtain a release of that lien in order for sale to go through.
4. If a short sale is approved and closed, seller doesn’t owe anything to the lender(s).
It depends on the terms and verbiage in the approval letter. The letter must state release of lien AND satisfaction of debt (or similar verbiage) or seller is still responsible for the deficiency balance.
5. If a short sale approval includes seller signing a promissory note, the seller can just “bankrupt” it later.
Seller may not be eligible for bankruptcy. And even if they are, they may not be able to bankrupt new note as they signed it with intention of never paying. New note may prohibit bankruptcy or may not be able to be included in bankruptcy. Seller should discuss with bankruptcy attorney before ever signing a new promissory note with that intent.
6. A seller can buy a new house while credit is still good and then just short sale the old house.
In order to obtain a mortgage on the new house, seller had to prove they can afford both house payments. They cannot now claim they can’t afford payment on the old house, therefore, in most cases, no hardship and short sale may likely be denied or approved with terms at high cost to seller.
7. It’s good to submit any short sale offer to lender to “get the ball rolling.”
Short sale negotiations are buyer specific. In most cases, when bad offer is rejected and new offer is submitted, the whole process starts over from the beginning.
8. A bad offer is better than no offer.
A bad offer still takes time to negotiate out. When bad offer is being worked on, showings diminish. When bad offer is rejected or countered at terms buyer won’t accept, your seller is now a couple of months closer to foreclosure and time has been wasted.
9. All short sale offers must be submitted to lender.
All offers must be submitted to the seller. Seller can reject any offer their agent feels will not be approved by lender, therefore, it is not submitted to the lender for the reasons above.
10. Deposit of earnest money isn’t important.
Get earnest money deposited as it shows buyer’s sincere intent to follow through with purchase. But most importantly, buyer and their agent will have to provide you with cancellation to get earnest money back, therefore, you and seller will know immediately if buyer has “walked.”
11. A seller will have to pay income taxes if a 1099 is issued after short sale.
It is common through tax law and/or seller insolvency that seller will not have to pay taxes on the income stated on the 1099. It is case by case and seller needs to consult tax professional.
12. A seller won’t get a 1099 if property goes through foreclosure.
Seller may receive a 1099 on lender’s loss via foreclosure. Same rules apply as in #11.
13. Bank of America is the worst lender to deal with in short sales.
Love the new Bank of America in short sales! They are easy to work with and time is down to about eight weeks plus investor. US Bank is the most difficult!
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