Misconception 1. When a property goes through foreclosure, the owner/borrower is released of all debt.
Truth: There are 2 methods a lender can foreclose on a property; Foreclosure by advertisement and Forclosure by action (litigation). The owner/borrower is only released from the debt of the foreclosing entity if the entity forecloses by advertisement. If the entity forecloses by action, then the borrower is still responsible for the debt. If there is a second or third mortgage, the owner/borrower is still responsible for those debts even after end of redemption period.
Misconception 2. After the foreclosure sale, the other mortgages are eliminated.
Truth: The other mortgage companies still have a lien on the property after the foreclosure sale. The other mortgage companies liens only goe away at the end of the redemption period. If the owner intends on redeeming the property during the redemption time, the other mortgage holders are entitled to the proceeds and must be negotiated for release of the leins.
Misconception 3. If an owner/ borrower has filed bankruptcy, the second mortgage “goes away”.
Truth: There are 2 documents invloved in the purchase of a property when a mortgage is involved; the mortgage and a promissory note. Even if the debt on all mortgage holders on the property were named in the bankruptcy, the bankrutcy only eliminates the obligation under the promissory note, Not the leins which are covered by the mortgages.
Misconception 4. If a short sale is approved by the mortgage companies and successfuly closes, the owners obligation to the lenders is eliminated.
Truth: It depends on the terms that the mortgage companies agree to. The letters must state that the liens AND the debts are released. If there is not statement indicating release of the debt then the seller is still responsible for the amount of the deficiency.
Misconception 5. If a short sale approval requires the owner/borrower to sign a promissory note, the seller can just claim the new note in a bankruptcy later.
Truth: The owner/borrower may not be able to declare bankruptcy. Even if they are able, they may not be able to name the new note in the bankruptcy because they signed the new promissory note with the intention of not paying.
Misconception 6. A seller may buy another home while their credit is still good and then short sell the previous home.
Truth: In order to obtain a mortgage on the new house, the seller had to prove they can afford both house payments. They cannot now claim they can’t afford the payment on the old house, therefore, in most cases, there is no hardship and a short sale may likely be denied or possibly approved with terms at high cost to seller.
Misconception 7. It’s best to submit any short sale offer to the lender to “get the process started.”
Truth: The short sale negotiations and approvals are specific to each buyer. When an offer is rejected by the lender and another offer is submitted, in most cases the process starts over.
Misconception 8. A poor/low offer is better than no offer.
Truth: A poor/low offer still takes time to negotiate. When a poor/low offer is being negotiated, showing activity is less. When the poor/low offer is rejected or countered and the buyer cancels the purchase agreement, your owner/borrower is now a closer to foreclosure and time has been wasted.
Misconception 9. Any and all short sale offers must be submitted to the lender.
Truth: Any and all offers must be submitted only to the owner/borrower. The owner/borrower can can then reject any offer they feel will be rejected by the lender
Misconception 10. Depositing the earnest money isn’t that important.
Truth: Deposit the earnest money. It shows the lender that the buyer is sincere and intends to complete the purchase. Another advantage is the buyer will have to submit a cancellation to get their earnest money back. You will immediately know that the buyer is bailing out.
Misconception 11. If the owner/borrower receives a 1099 after the short sale they will have to pay taxes on the amount of the forgiven amount.
Truth: If the owner qualifies the The Mortgage Forgiveness Debt Relief Act can be used to eliminate the responsabilty to pay the tax. The owner should consult with their tax professional.
Misconception 12. An owner/borrower will not get a 1099 if the home is foreclosed upon.
Truth: The owner/borrower might receive a 1099 specific to the lender’s loss.
I am not an attorney. This article was paraphrased from an article written by Wendy Haisley of Markve & Zweifel, Attorneys at Law, PLLC
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