Short Sale vs. Foreclosure: Holding the mortgagor responsible for the difference between mortgage principal and short sale offer

Question: We are selling our house via a short sale and have received an offer of 25% less than the mortgage principal we owe on the house. The bank has accepted the short sale offer but asked that we pay an additional $15,000 to the offer. The bank stated that if we pay the $15,000, we will be released from the remaining debt on our loan. What is the law regarding holding a mortgagor responsible for the difference between the mortgage principal and the short sale offer? Should we pay the $15,000 requested by the bank (we made a counter offer of 25% of what the bank requested), or should we let the house go into foreclosure? The foreclosure date has been scheduled within two months from now.

Response: Generally, conducting a short sale has tax consequences for the borrower in terms of the difference between the sale price and the mortgage amount. In today's economy, where the banks benefit a lot more from a short sale rather than waiting for many years to conduct a foreclosure sale, they are willing to negotiate with the borrower by releasing some or all of the additional debt. It is always a good idea to negotiate with the bank and you did the right thing by giving a counter offer. However, what is not clear to me is whether the bank has asked for additional $15,000 specifically to discharge additional debt or because they think the short sale offer is too low, i.e., they think they could receive $15,000.00 more if the bank conducted the sale itself (usually the banks look at today's fair market value when deciding what amount to settle for). As far as letting the home go into foreclosure, that too, may have severe financial consequences. The bank may obtain a deficiency judgment against you and go after your other personal assets to try to recover some of its money that were previously lent to you. Both short sale and foreclosure will adversely affect your credit but more so with foreclosure than the short sale. If the bank is willing to accept a deed-in-lieu of foreclosure, that could be more advantageous to you, as you could avoid a deficiency judgment and it would be less harmful to your credit. However, the banks are not generally willing to entertain the idea of a deed-in-lieu when a short sale is still a possibility. Between two evils you are currently faced with, I would definitely say that a short sale is a lesser evil than foreclosure. As a side note, if you need more time to go through with the short sale and your foreclosure sale date is approaching, bring an Order to Show Cause to court to stop the foreclosure sale on an emergency basis. For example, short sale will take place soon and you need more time.

In the legal blog, Attorney Svetlana Kaplun addresses typical questions our firm has received from our clients, or come across from homeowners related to foreclosure, foreclosure defense, loan modification and bankruptcy topics.


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