Short Sale Process in New Jersey
The purchase agreement (contract) and any realtor’s fees must state that both are “contingent upon the approval of the lender”. The homeowner (seller) must accept an offer. Then the bank (lender) must approve the terms of the offer as well as sign-off on the homeowner’s financial hardship circumstances. The homeowner will need to prove a financial hardship for the bank to approve the “short sale”.
This will be done by the real estate investor, real estate agent or attorney providing the purchase agreement, a title company will provide title report, proposed settlement statement. Homeowner will provide financial information to the bank. (i.e. the seller’s income /asset / debt statements, bank statements, hardship letter, tax returns, employment information, etc).
The bank will do its own research on the property to confirm that the sale price is justified. They do this by having a local real estate agent complete a BPO (Broker’s Price Opinion). This is their equivalent of an appraisal. The listing agent must make sure there are comparative sales similar to the price that is accepted, or the bank will reject the transaction.
- The seller list the house on the market with a Realtor
- The seller authorization the investor, real estate agent or attorney to communicate with the lender.
- The seller gathers all requested financial and hardship information and provide it the lender.
- The seller’s realtor provides a listing agreement, comparable sales to the bank.
- An offer is received and negotiated between a buyer and the seller. The contract is signed by both parties. The bank does not sign the contract. They only approve the short sale.
- All the documents are submitted to the lender or lenders if a homeowner took out an equity line of credit against the home.
- The seller’s file is assigned to a loss mitigation negotiator at the bank(s)
- In approximately 7-120 days, the bank approves or denial of the short sale.
There is no guarantee that the “short sale” will be approved. The risks will increase if there are two lenders. Most lender will a short sale if there are federal tax liens on a property, mechanics’ liens, outstanding HOA dues. If the homeowner has significant liquid assets (not retirement accounts), the lender will often ask them to pay the shortage owed on the mortgage. Often, the second lien holder will expect the seller to remain liable, through a promissory note, for the second loan. The bank have the option of assessing tax liability to the seller for the amount forgiven (in the form of a 1099). This is called “forgiveness of debt” income.
Liability For Deficiency
Because the sale price is “short” of the full debt amount in a short sale, the difference between the total debt and the sale price is the “deficiency.” Example. … In many states, the lender can seek a personal judgment against the borrower after the short sale to recover the deficiency amount
Example. Your lender approves a short sale for $200,000, but you owe $250,000. The difference ($50,000) is the deficiency.
Deficiency Judgments After Short Sales in New Jersey
Unless the lender agrees to add a provision to the short sale agreement that states the transaction fully satisfies the mortgage debt, the lender retains the right to get a deficiency judgment.
Filing For Bankruptcy
How Can I avoid a deficiency judgment following a short sale?
You might be to avoid having to pay back a deficiency by taking one of the following tactics:
If you are liable to pay the deficiency after a short sale, you can file bankruptcy to eliminate the debt. If you qualify, a Chapter 7 bankruptcy discharges the deficiency relieving you of the debt, while a Chapter 13 bankruptcy will usually require that you pay a portion of the total amount owed. Bankruptcy might not be a good idea if a deficiency judgment is your only debt, but it could be a good option if you have multiple debts that you cannot afford to pay.
Negotiating With The Lender To Waive The Deficiency Judgment
Some lenders will agree to waive the deficiency. When negotiating with your lender for short-sale approval, ask it to forgo the right to seek a deficiency judgment. If your lender agrees, this provision must be included in the short sale agreement. The agreement must expressly state that the transaction is in complete satisfaction of the debt or include similar language.
Making A Settlement Offer
If your lender refuses to waive the deficiency entirely, you can offer to settle the deficiency for a lesser amount. Lenders are sometimes willing to agree to accept a lesser amount because collecting a deficiency debt can be a lengthy and costly process. It is often easier for the lender to accept a reduced lump sum than to try to collect the full amount. Or you can also negotiate to repay a reduced deficiency debt in installments over time.
Your Lender May Not Sue You For The Deficiency
After the short sale is completed, your lender might call you or send letters stating that you still owe money. These letters could come from an attorney’s office or collection agency and will demand that you pay off the deficiency. Your lender or the collector might even try to intimidate you into making payments. But without an actual deficiency judgment from a court, the creditor cannot freeze your bank accounts, garnish your wages, or place judgment liens on other property you own.
To get a deficiency judgment, the creditor must file a lawsuit. But lawsuits are expensive, and many borrowers who complete a short sale to avoid a foreclosure are judgment proof. (“Judgment proof” means you don’t have much in the way of cash reserves or other assets that a creditor can take to pay off the judgment.) Creditors typically sue for a deficiency judgment only if they think you have sufficient assets or funds to repay the debt. If you can’t afford to pay the deficiency, it’s possible that your lender won’t bother to file a lawsuit.
Possible Tax Penalties
If the lender forgives the amount of the deficiency—say, as part of a settlement—and issues you an IRS Form 1099-C, you might have to include the forgiven debt as taxable income.
Talk to an Attorney
Tax laws are complicated, an exception or exclusion could save you from having to report canceled debt as part of your income. If you have tax questions, consider talking to a tax attorney.
If you have questions about how foreclosure works or different ways to avoid foreclosure, like with a short sale, talk to a foreclosure lawyer. A HUD-approved housing counselor can also answer questions about foreclosure alternatives.
Garden State Cash Homes LLC
If you are considering a short sale in New Jersey, we buy short sale houses and we can work with the bank to buy your house fast. Call us 732-732-0940 or fill out our online form today!
The materials available at this web site are for informational purposes only and not for the purpose of providing legal advice. You should contact your attorney to obtain advice with respect to any particular issue or problem.