REO (Bank Owned Properties) and Short Sales seem to rule the market these days but many people need to be aware of the hidden dangers involved in selling a home through the short sale process.
In theory a short sale process occurs when a homeowner agrees to sell their home for less than what is owed on the mortgage. However, in order to finalize the short sale process, the lending bank must agree to the price, terms and conditions of the sale. And here is the important part: the bank must accept the proceeds of the sale as PAYMENT IN FULL of the existing morgage otherwise sellers will be in for a nasty surprise.
Homesellers must have absolute clearity on this from their lender as some lenders will agree to the short sale but deny the resulting proceeds as their payment in full.
In Arizona, anti-deficiency laws* help protect homeowners from being sued for monies still owed when their home goes into foreclosure, but many times lenders state that a shortsale is not a foreclosure and therefore these anti-deficiency laws will not apply.
Unless the seller has the debt satisfied in full upon the sale of the property in writing from the lender, the lender can sue the homeowner after the sale for the remainder of the unpaid debt. Many lenders state that they are entitled to the deficiency or uncollected balance. MAKE SURE BEFORE YOU SELL!
And then on the other front, there exists the possibility that the IRS will consider the debt forgiveness as earned income to the seller for that year. Nobody needs a surprise such as this come tax time. You should consult with your tax specialist of your tax obligations here prior to listing your home.
*As I write this, I understand that there are only seven states that offer the Anti-Deficiency Protection Law for foreclosures - Arizona being one of them.
Hope This Helps!
Joe
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