Short Sale Home » Seller » Short Sale Contracts Can Come with Inserted Language

Short sales have been on the MLS for at least a couple years now, but now the banks or lenders are coming up with another way to gain additional money to cover their losses.

A short sale is supposed to allow a borrower to sell their property for less than what is owed on the mortgage, walk away from the home and avoid foreclosure. Lenders are now trying to insert language into short sale contracts to allow them to sue for any “deficiency” or the amount lost by the bank by selling it for less than what was owed on the mortgage. This language can make the homeowner vulnerable by opening the door for collection agencies and court judgments to go after that lost amount.

Recently, real estate agents have seen about 50 percent of short sale contracts including this language. If caught and requested by the real estate agent, most of the time the banks will remove the language: lender may “pursue for a deficiency judgment for the difference in the payment received and the total balance due”.

Attorneys say that such clauses mean that the borrower’s trouble wouldn’t end with the sale of the property, but the lender could sue the borrower for a deficiency at a later date or turn over the unpaid debt to collection agencies after the short sale closes at escrow.

In these cases, it proves having a knowledgeable real estate agent will help in the short sale process. Although, borrowers can still face deficiency judgments at any point on certain types of loans. California law allows special privileges for “purchase money” loans (the original loan used to buy the home). In these mortgages the bank cannot legally sue the borrower for a nonpayment. Thus, a borrower late on a purchase money loan cannot face a lawsuit, even if no money was put down. But if the borrower refinanced the mortgage or has a home equity line of credit, the borrower can be sued for unpaid amounts following either a foreclosure or a short sale.

If the borrower can negotiate a short sale the bank may issue a contract that says it will agree to sell the property and release the borrower from the “trust deed”, the contract stating the borrower must pay back the loan in full.

Just watch out. The lender may be sneaky to keep any doors open to collect on any deficiencies at a later date.