Mortgage question: What happens in a short sale?

[Demon-Xanth]

I understand that the buyer isn't responsible for the gap in the sale price vs. mortgage. But what happens between the bank and former owners regarding the amount that is short?

 

[waggy]

wouldnt the seller still be responsible for it?


the bank wouldnt be or the new buyer and its not going to go poof.

 

[Demon-Xanth]

The options I see:
prior owner pays
collections
bankruptcy
bank calls it a loss
insurance

 

[Mark R]

The seller must pay the difference before the bank will allow the sale to take place.

If the sale is a forced sale (e.g. foreclosure) then the sale will go through, but afterwards the bank may be able to sue the seller for the difference.

In most US states, if your mortgage was arranged for the sole purpose of buying a home, then the seller is immune to having any shortfall collected, and the bank must eat the difference. Many banks require the mortgagor to have insurance, so that the insurance could pay out if there is a high risk of the mortage going upside-down.

However, if your mortgage was for any other reason (e.g. a refi, HELOC, etc.) then the bank can use any legal means to recover their money. Insurance, bankruptcy, wage garnishment, etc. Even insurance may not help in this case, although the insurance will pay off the shortfall of the mortgage - the insurance company are customers of the bank, and they are entitled to reclaim their costs from the mortgagor (so, if there is a shortfall, even if there is insurance, the insurance company can sue the seller).

 

[kranky]

In a short sale, the lender agrees to take a loss on the mortgage and the borrower is no longer responsible to the lender for the difference. However, the lender will most likely issue a 1099 to the borrower for the difference (loss), and the borrower will owe income tax on the amount of debt forgiven.

 

[waggy]

don't you need the ok from the lender before you do that thouhg? if not then wouldnt the burden still be on the seller?

 

[Demon-Xanth]

Originally posted by: waggy
don't you need the ok from the lender before you do that thouhg? if not then wouldnt the burden still be on the seller?

Yes.

<-- still waiting on the bank on an offer he submitted.

 

[dud]

"I understand that the buyer isn't responsible for the gap in the sale price vs. mortgage. But what happens between the bank and former owners regarding the amount that is short?"

No, not necessarily ...

If your bank agrees to a short sale, you then hire an agent to find a buyer for the house, you sell the house for a loss, and with the bank?s blessing, they agree to eat the loss (although they could still demand the homeowner make some kind of payment or share the loss).

 

[brxndxn]

In my area, the banks are sitting on tons of properties and refusing to sell them at prices that I offer... So, I'll just let the banks sit on properties until they cannot afford to any more.

 

[waggy]

Originally posted by: dud
"I understand that the buyer isn't responsible for the gap in the sale price vs. mortgage. But what happens between the bank and former owners regarding the amount that is short?"

No, not necessarily ...

If your bank agrees to a short sale, you then hire an agent to find a buyer for the house, you sell the house for a loss, and with the bank?s blessing, they agree to eat the loss (although they could still demand the homeowner make some kind of payment or share the loss).

if they are going to make the seller eat the loss then why accept the short sale? Also the bank can't make the buyer pay for it.

 

[Demon-Xanth]

Originally posted by: waggy

Originally posted by: dud
"I understand that the buyer isn't responsible for the gap in the sale price vs. mortgage. But what happens between the bank and former owners regarding the amount that is short?"

No, not necessarily ...

If your bank agrees to a short sale, you then hire an agent to find a buyer for the house, you sell the house for a loss, and with the bank?s blessing, they agree to eat the loss (although they could still demand the homeowner make some kind of payment or share the loss).

if they are going to make the seller eat the loss then why accept the short sale? Also the bank can't make the buyer pay for it.

Because then they're sitting on both a liability and a debt.

If your options are to hold onto something that you put $300k in that requires maintenance, taxes, etc. and is only worth $200k. If a house isn't lived in, it tends to decay unless maintenance is performed on a regular basis, which costs money. It could be a decade before the bank would break even, during which time it will have been losing money the entire time.

 

[glugglug]

Originally posted by: Mark R
Many banks require the mortgagor to have insurance, so that the insurance could pay out if there is a high risk of the mortage going upside-down.

So what happens when all the insurance companies go belly up sometime in 2008?

 

[waggy]

Originally posted by: Demon-Xanth

Originally posted by: waggy

Originally posted by: dud
"I understand that the buyer isn't responsible for the gap in the sale price vs. mortgage. But what happens between the bank and former owners regarding the amount that is short?"

No, not necessarily ...

If your bank agrees to a short sale, you then hire an agent to find a buyer for the house, you sell the house for a loss, and with the bank?s blessing, they agree to eat the loss (although they could still demand the homeowner make some kind of payment or share the loss).

if they are going to make the seller eat the loss then why accept the short sale? Also the bank can't make the buyer pay for it.

Because then they're sitting on both a liability and a debt.

If your options are to hold onto something that you put $300k in that requires maintenance, taxes, etc. and is only worth $200k. If a house isn't lived in, it tends to decay unless maintenance is performed on a regular basis, which costs money. It could be a decade before the bank would break even, during which time it will have been losing money the entire time.

oh i get it.

just what dud said is confusing.

if you short sale a house (at that time you gotta be in bad situation) the bank knows its either short sale or perhaps forclosure. at least with a short sale they get closer. they agree so why would they then come back after the seller? either they accept it ro they do not.


and they can't go after the buyer. unless its part of the contract but then who would do such a thing?

 

[Demon-Xanth]

Originally posted by: waggy
oh i get it.

just what dud said is confusing.

if you short sale a house (at that time you gotta be in bad situation) the bank knows its either short sale or perhaps forclosure. at least with a short sale they get closer. they agree so why would they then come back after the seller? either they accept it ro they do not.


and they can't go after the buyer. unless its part of the contract but then who would do such a thing?

That's why I'm asking. In many cases the short sales here are repossessions or loans in default. So the owner and bank are already in a not-good place. I'm just wondering what is happening to all the debt and debtors.

 

[dud]

" ... and they can't go after the buyer. unless its part of the contract but then who would do such a thing?"

A foreclosure can cost a lender as much as $70,000 or more to process. It would/could be in the lender's best interest to "short" sale a property if it costs them less than foreclosing.

From a buyer's perspective it is BAD to have a foreclosure on your credit history. It is like a huge blotch that will ruin many possibilities for the next 10 or so years of your life. For many homeowners foreclosure is the only way out of a bad situation and for some stupid ones they see it as would a renter skipping out on paying the rent.

When you say that "they can't go after the buyer ..." foreclosure is an indirect way for the "system" to go after the buyer. In many ways it's a great way for a buyer to kick themselves in the ass.

Bad debt is generally written off as a cost of doing business. It affect's the lender's bottom line and profitability.

 

[Demon-Xanth]

Originally posted by: dud
" ... and they can't go after the buyer. unless its part of the contract but then who would do such a thing?"

A foreclosure can cost a lender as much as $70,000 or more to process. It would/could be in the lender's best interest to "short" sale a property if it costs them less than foreclosing.

From a buyer's perspective it is BAD to have a foreclosure on your credit history. It is like a huge blotch that will ruin many possibilities for the next 10 or so years of your life. For many homeowners foreclosure is the only way out of a bad situation and for some stupid ones they see it as would a renter skipping out on paying the rent.

When you say that "they can't go after the buyer ..." foreclosure is an indirect way for the "system" to go after the buyer. In many ways it's a great way for a buyer to kick themselves in the ass.

Bad debt is generally written off as a cost of doing business. It affect's the lender's bottom line and profitability.

The "buyer" is the one buying the house that's being foreclosed, not the one getting kicked the curb.

 

[waggy]

Originally posted by: dud
" ... and they can't go after the buyer. unless its part of the contract but then who would do such a thing?"

A foreclosure can cost a lender as much as $70,000 or more to process. It would/could be in the lender's best interest to "short" sale a property if it costs them less than foreclosing.

From a buyer's perspective it is BAD to have a foreclosure on your credit history. It is like a huge blotch that will ruin many possibilities for the next 10 or so years of your life. For many homeowners foreclosure is the only way out of a bad situation and for some stupid ones they see it as would a renter skipping out on paying the rent.

When you say that "they can't go after the buyer ..." foreclosure is an indirect way for the "system" to go after the buyer. In many ways it's a great way for a buyer to kick themselves in the ass.

Bad debt is generally written off as a cost of doing business. It affect's the lender's bottom line and profitability.

I know why the bank would accept a short. it gets them closer to what htye have loaned out. I also know why the seller wants to short. nobody wants a forclosure on there credit history.

most people buying forclosures know the risk. they are takeing a gamble of getting a home cheap. Even with throwing some cash to remodel the odds they are still going to come out ahead. its a risk..most that buy forclosrures know it.


but in a short sale the BUYER of the new house wont be responsible of the amount left over.

 

[FoBoT]

Originally posted by: Demon-Xanth
The options I see:
prior owner pays
collections
bankruptcy
bank calls it a loss
insurance

that was my experience, the bank wrote off the difference