The Approval Experts | San Diego Real Estate | Short Sales

When you short sale your home, there are some key terms that you need to be aware of including whether or not you have recourse loan. It is important to understand the process of a short sale and the difference between a recourse loan and non recourse loan before you decide if this program is right for you. Not all homeowners can benefit from a short sale, but many can and it is a better alternative than a foreclosure. Let’s take a look at what the process entails and how you can get the most out of it.

How a Short Sale Works

Generally a foreclosure works where a homeowner walks away from a mortgage, which gives the bank an opportunity to sue for balance owed and possibly pays a heavy penalty credit wise. The short sale allows you to pay off most of what you owe and potentially salvage your credit. This short sale solution is a benefit to those who have no equity in their home, have an adjustable loan where the monthly payments are increasing or simply can’t afford their mortgage payments.

Qualifying for a Short Sale

In order to qualify for a short sale, a home owner must owe more than the home is actually worth. In order to determine this, a broker’s price opinion or appraisal is needed. Most banks will have a broker complete the BPO if you approach them for a short sale or you can request to have it done yourself. While banks don’t particularly enjoy doing a short sale, it is better for them financially than a foreclosure and most banks will be willing to work with you.

Once you have determined that you do owe more than the home is worth, the next phase of a short sale can begin. Your bank will need to see financial documentation and you will need to provide a hardship letter explaining your situation in full. Only then will they consider your request and determine whether or not to proceed with the short sale.

At this time, the recourse or non recourse loan issue will arise. The vast majority of short sales are done under a non recourse loan policy. This means that the home owner and the bank agree to a figure that is less than the actual debt but suitable for both parties giving the banks no recourse once the home is sold. It is entered on a credit report as a debt that is settled for less than is owed.

Non Recourse Loans

A non recourse loan means that the bank cannot go after the home owner for the additional amount above and beyond what the short sale brings. The home owner is no longer liable for that amount and is free to get on with their lives. A recourse loan is very different. In this situation, the homeowner is responsible for the amount above and beyond the actual short sale and will responsible to pay this debt back to the bank.

Some states are recourse states while others are not. California for example is a non-recourse state. This essentially means that as long as the homeowner has purchased their property with a purchase money loan or used a home equity line of credit for home upgrades or in the purchase itself, the banks do not have recourse after the short sale is complete. In other states the banks do have the ability to come after the homeowner for the balance owed.

Some banks are asking clients to sign a promissory note for the balance owed. As every case is unique, we suggest that you speak to an attorney and let them know the details about your particular situation. Both real estate attorneys and tax attorneys are an asset when moving forward with the short sale process.