Do I still owe the bank after a short sale?
Maybe. When you sell your home for less than the amount you owe against it, something needs to be done about the balance left over. This is called the deficiency balance. The bank can do one of three things:
- choose to forgive this balance, known as a waiver of deficiency.
- they can ask you to pay it back by carrying a unsecured note.
- they can pursue a judgement or collection on the remaining balance.
Some states like California have passed laws that require lenders to waive the deficiency if they agree to accept a short sale. Colorado does not currently have such a law so you will need to negotiate the waiver of deficiency
Do most banks waive the balance after a short sale?
Generally, most 1st position lien holders will waive the remaining balance on a short sale. 2nd liens get a much smaller portion of the funds in a short sale and as a result will generally want to make up the difference in some way. They may ask for you to contribute funds at closing, send your account to collections, or sue you in court to get a judgement against you.
There are federal short sale programs like HAFA, that require all participating lenders to waive the balance. There are other programs like the Chase Short Sale Outreach and the Bank of America Cooperative Short Sale Program that also have the deficiency waiver built in. If you are not participating in these programs, it is important that your agent negotiate this release and have it built into the short sale approval letter
Do I have to hire a real estate agent to do a short sale?
There is no state law that requires you to hire a licensed agent to sell your house in a short sale. The bank however may require that you list the home for sale with a local real estate professional to ensure that you are doing everything possible to get fair market value for the property. They can’t force you to list your home with an agent, but they can refuse to do a short sale if you don’t.
Do I have to show the bank my financial information?
Generally the bank will want to see that you do not have the capacity to continue to make your loan payments until it is paid off as agreed when you borrowed the money. Because of this, they will need to see that there is a reason for you to sell your home. If you are claiming that you can no longer afford to make your payments, they will require proof of that. This is done by having you supply tax returns, bank statements, and recent paystubs and a short sale hardship letter. There are some short sale programs that require a limited amount of documentation which would eliminate the need to supply financial documentation.
Do I have to pay for someone to negotiate my short sale?
No. You don’t have to pay to sell your home on a short sale. The commissions paid to real estate agents come out of the banks proceeds. Some states allow for short sale negotiators to collect a special fee for negotiating a short sale that will be separate from a real estate commission. It is beneficial but not necessary to hire a specialist to handle your short sale. They can often be paid by the buyer, bank, agent or the seller.
Judicial or Non-Judicial Foreclosure State?
In Colorado, lenders may foreclose on deeds of trusts or mortgages in default using either a judicial or non-judicial foreclosure process.
The judicial process of foreclosure, which involves filing a lawsuit to obtain a court order to foreclose, is used when no power of sale is present in the mortgage or deed of trust but can be used even if there is. Generally, after the court declares a foreclosure, your home will be auctioned off to the highest bidder. This is not common
The non-judicial process of foreclosure is used when a power of sale clause exists in a mortgage or deed of trust. A “power of sale” clause is the clause in a deed of trust or mortgage, in which the borrower pre-authorizes the sale of property to pay off the balance on a loan in the event of the their default. In deeds of trust or mortgages where a power of sale exists, the power given to the lender to sell the property may be executed by the lender or their representative, typically referred to as the trustee.
Does Seller Owe Deficiency Amount After Foreclosure or Short Sale?
Yes on a short sale, unless the lender releases them in the short sale approval letter.
State Licensing Laws for Foreclosures and Short Sales
- Section 38-38-101. Owner of evidence of debt may elect to foreclose – notice – record of sale – withdrawal.
Law which regulates how real property becomes a foreclosure.
- Section 38-38-104. Right to cure when default is nonpayment – right to cure for certain technical defaults.
Law which regulates the borrower’s right to come current on loan in default.
- Section 38-38-302. Redemption within specified period – procedure.
Law regulates the time line of the redemption period.
- Section 38-38-401. Issuance of certificate of purchase.
Law which regulates the proper transfer from public trust or sheriff to purchaser.
- Section 38-38-501. Title vests upon expiration of redemption periods – confirmation deed.
Law which regulates title from a trustee’s deed. (Buyer beware)
- Section 38-38-601. Receiver appointed upon application.
Law which regulates the obligation of the owner in possession.
- Section 38-38-701. Application – use of term “foreclosure”.
Law which regulates what a foreclosure consists of.
- Section 38-39-102. When liens of deeds of trust shall be released.
Law which regulates the method to release a lien
- Section 38-39-104. Satisfaction of mortgage.
Documentation required to satisfy or release a loan
- Colorado State Statutes