The rules for short sales keep changing

If a home is not sold as a short sale and goes into foreclosure, all the mortgages may be wiped out except first mortgage, so any second or third mortgages may be a total loss to their respective bank. Second and third mortgages are often held by different banks from the first mortgage. A year ago a second mortgage would accept from zero dollars up to $1000 payment and agree to a short sale. So would home equity lines of credit. Not now. Today, the second lien holder often demands $3000-5000 from the first mortgage bank to agree to a short sale, and they may demand sellers sign a note agreeing to pay back a portion of the loan. Banks have figured out a way to recoup some of their huge losses by demanding some cash now and a promise to pay later. Additionally, some homeowners are also required to bring money to the closing if the bank determines they are in a financial position to do so.

Please note that if a prior promissory note has been signed on any of the mortgages, the bank can still come after the parties and obtain a judgment after the sale. A breach of contract has a long time period, so it can be years after the short sale that the bank can still come after the borrower. This is important to negotiate at the time of the short sale to have this waived.

It is not part of this discussion, but one of the comments mentioned liens that survive aforeclosure. There are liens that do, such as Federal tax liens, child support liens andconstruction liens. Check with professional legal/financial counsel for others. The liens for the purpose of this discussion are the mortgage liens.

So who qualifies for a short sale?

Homeowners with a genuine hardship who owe more money than their home is worth due to: job loss, medical reasons, divorce, or relocation that deplete a home owner's assets are considered by banks to be genuine hardship. In this instance, a bank will typically agree to a short sale and not demand cash at closing or a promissory note (but that doesn't mean prior promissory notes signed at the time of the loan may not come up later - this has to be negotiated to be waived).

So who may not qualify for a penalty-free short sale?

1. Homeowners who realize their home is worth less than what they paid and they just don't

want to make the payments anymore.

2. Homeowners who have significant assets and income.

3. Homeowners who have bought a second home.

4. Investors.

lenient with negotiating due to the number of short sales and foreclosures in those markets.

The observations here are what we are seeing in our market. There are situations where the

borrower who can be in the investor, second home, significant assets, or just upside and

wants out category walks away with little or no money out of pocket or without signing a

promissory note, but in our market and our experience, this is an exception.

Homeowners who qualify for a short sale as of now will usually not be asked by the

bank to execute promissory notes for any balance owed. Homeowners who do not

qualify for a penalty-free short sale may be required to either sign promissory notes

and/or bring cash to closing or the property will go into foreclosure.

What should you do if you are behind in your payments?

If you are behind in your payments, call your bank(s) and keep communications open. Ask to speak to someone in the Loss Mitigation Department. You may qualify for a loan modification or another program. Seek the advice of your financial adviser, accountant and attorney to give you all the information about your particular situation.

So should you do a short sale or not?

Short sales affect your credit for two years. After two years, you may buy a home again.

Foreclosures impact your credit for five years. Bankruptcy has a more negative impact than a short sale also.