Delaware Short Sale Assistance

As your Delaware Short Sale Specialist, I am including general guidelines to help you understand the legal aspects of a Delaware Short Sale. This is not legal advice. Instead, it provides a framework for discussion with your attorney, tax preparer, and lender.  Please note that laws and lender policies are always subject to change. 

Common questions and answers about Delaware Short Sales:

Q: Will a Short Sale wipe out my mortgage loan obligation, or will I be financially responsible for the bank’s loss?

A:  You may still be responsible for some, or all, of the deficiency balance. This is truly a case-by-case scenario depending on your lender and your financial assets, and whether or not your lender will negotiate the issue. 

The difference between your home sale proceeds and the outstanding, unpaid debt is called the deficiency balance. Generally, lenders have the right to pursue you for any unpaid balance of your mortgage. They accomplish this by filing a Deficiency Judgment for the remaining debt, which enables them to take collection action, including wage garnishment. 

Given the broad scope of the foreclosure crisis and the recession of the past several years, some lenders forgave the deficiency balance and issued a formal waiver. The Federal Government encouraged this under the Mortgage Debt Relief Act of 2007, which also forgave the deficiency balance for IRS purposes. Otherwise, thousands of distressed home sellers would have had to pay income taxes on their forgiven debt. Since the MDRA of 2007 is set to expire on December 31, 2012, the tax implications for future short sales are a large concern. 

The MDRA did not require banks to forgive the deficiency balance; it only added income tax forgiveness for those who already received a waiver of deficiency. Therefore, even if the MDRA is extended, you cannot assume to be “off the hook.” 

Since not all banks will volunteer to waive the deficiency, and the State of Delaware does not require them to do so, you may have to negotiate a waiver of deficiency with your lender as part of the short sale. 

As of November 1, 2012, mortgages secured through Freddie Mac and Fannie Mae have a streamlined Short Sale process that includes an escape hatch for the deficiency balance. The catch: you may have to pay something into the deal to obtain a waiver.  If you can prove you do not have the financial ability to make a contribution, you may be granted a waiver. This is a case-by-case review. See my blog post for an overview. 

Q: What about my second mortgage?

A: If you have a first mortgage and also a home equity loan with an outstanding balance, or any type of second mortgage, the second lien holder may pursue you for their loss independently of the first mortgage.  Sometimes a second lien holder will refuse to allow a short sale since they stand to face a 100% loss on the debt. 

Never assume any lien holder is waiving anything; all debt forgiveness should be negotiated up front. Even then, you need your deficiency waiver in writing once the deal is accepted. 

Effective November 1, 2012, the streamlined Short Sale process for Freddie Mae and Freddie Mac includes compensation for second lien holders, giving them incentive to sign off on the deal.  It is generally expected, but not known for certain, if accepting the incentive requires the second lien to forgive their portion of the deficiency balance.  Again, make no assumptions and get waivers in writing.

Q: How much information will my bank want in order to consider a short sale?

A: The kitchen sink. It isn’t much different than applying for a mortgage today. Your lender will want proof that you cannot afford the home, and that if a short sale is not conducted, they will be facing the more expensive process of foreclosure. 

Be ready to submit a hardship letter, recent bank statements, copies of expenses and debts, pay stubs, tax returns, ect.  Your lender will pull a credit report and analyze your situation from a risk standpoint. They must also comply with investor guidelines and applicable regulations, which have paperwork requirements of their own. Do not be offended or intimated if your lender asks for more documentation. 

Q: Holy cow, where do I start?

A: Contact me! I have a great deal of experience in Delaware Short Sales. I will work with your lender to get you the best possible resolution. Let’s talk about your situation, and then you can decide if a Short Sale is right for you.