Q: I own a home, but I bought another home with my boyfriend. I listed the home I owned with an agent about three years ago and that’s when my broker told me that if I sold the home at what the market was at that time, I would owe my lender money at the closing.
So, we listed the home as a short sale. A couple of months later we got a first offer of $44,000, but my lender refused to accept that offer. They wanted $54,000, so the first buyer walked away. I had fallen behind on my loan payments and the home went into pre-foreclosure. I used money from my 401(k) to get it out of foreclosure. I did this to avoid having the loan balance tacked on to the balance of my home with my boyfriend. (I’ve heard lenders do that.)
We then got an offer for $20,000 and one for $25,000. But my lender refused both offers. They told us they would accept $34,000. One buyer said no, but the other agreed to the lender’s number. But then the lender asked for $59,900 and denied and refused the short sale. We lost that buyer as well and now I’ve fallen behind on my payments again even after taking out more money from my 401(k). What are my options?
A: There have been many complaints against lenders for their handling of short sales. Among one of the most frustrating issues that short sale sellers face is a lender that always has a moving target for the amount the lender is willing to accept from the sale.
You have to understand that a lender is not legally required to accept a short sale offer. When you financed your home with this lender, your lender agreed to give you the money and you agreed to repay the money. If you failed to pay, the lender had the right to force you out of the home and to sell the home and get whatever the lender can from the sale of the home to satisfy the debt owed the lender.
You may be in the minority of people that have elected to take money that they have put aside for retirement to pay their debts. Just as the lender is not required to accept a short sale, a borrower is not required to use retirement funds to pay the lender.
Many people would find your withdrawals from your retirement account to pay your lender admirable, while others would consider it foolish. Generally, retirement funds are protected from creditors. That is to say a creditor – your mortgage lender – would be unable to force you to use your retirement funds to pay the lender for your monthly mortgage expenses or to pay off the debt you owe the lender.
Unfortunately, your letter does not indicate whether you are employed. We can only assume that you are probably unemployed and are going through financial hardship at this time. However, if you can’t pay your expenses on your former home because your money is now going towards the payment of the expenses on the home you bought with your boyfriend, you would have made a mistake in not selling your home first before buying your current home.
Some might claim that you probably knew that you were going to have trouble selling your home, that you weren’t going to get enough money from the sale and that you bought your other home in anticipation of having a hard time in the sale of your home. That’s pretty cynical, and we think it’s entirely possible that life just got in the way, you got some mediocre advice from your real estate agent, and you never really thought through what would happen if it took three years to sell your home.
In a normal successful short sale negotiation with a lender, a buyer will come to you with an offer and you’ll forward that offer on to your lender. The lender makes an evaluation as to the current state of the real estate market in your area and as to your ability to pay any amount owed on the loan. The lender may also consider some other factors in determining whether to accept the short sale offer or not.
If the lender concludes that it is to the lender’s advantage to allow the short sale to proceed, it will approve it. However, if the lender suspects problems with the short sale offer, thinks the borrower may continue to make payments on the loan or believes that it will do better through foreclosure; it will deny the short sale.
If your lender has not behaved properly, you can always file a complaint against the lender with the Office of the Comptroller of the Currency. You can file a complaint online at www.HelpWithMyBank.gov.
One final note, generally if a borrower defaults on a mortgage, the lender has the right to foreclose on the home. If the lender doesn’t get enough money from the foreclosure, in many states the lender can pursue the borrower further by obtaining a deficiency judgment against the borrower. The lender can then try to collect from the borrower as a normal creditor might. The lender might even sell the debt to a debt collector and the debt collector can try to collect the debt.
It would be highly unusual for your old lender to add your prior debt to your new home with your boyfriend. If a lender obtains a deficiency judgment against you, the lender may attempt to place a lien on your new home. But any creditor could attempt to do that if you owe that creditor money and the creditor goes to court and gets a judgment against you.
You will face another problem down the line: Lenders will typically forgive the difference between what you owed and what you sold your home, known as the deficiency. The IRS normally treats deficiencies as income (even though you didn’t get money in your pocket from the deal) and you would owe income tax on that cash.
If you still lived in the home and it was your primary residence, this amount would be forgiven. Since you no longer live in the home, the deficiency would be taxable as income, should the property sell.
Right now, you should consult with an attorney who specializes in short sales as well as your tax advisor so you have a better understanding of what you are facing should the property eventually sell or go into foreclosure.