Short sales don't come cheap

Q: My wife and I have both had major reductions in our income over the last couple of years, and are in the process of trying to complete a short sale on our home. We have a contract with a buyer, and my mortgage lender has assigned a negotiator to my file. We submitted all the financial paperwork, hardship letter and other documents they requested, and the bank finally responded after several weeks. But their response was that they would allow the short sale to go through only if my wife and I would sign a promissory note agreeing to pay the bank $20,000 over the next 10 years.

We really can't afford these payments on top of our other bills and housing costs, but we wanted to do a short sale so that we could look forward to buying a home again in a couple of years. If we don't agree to the $20,000, the house will be foreclosed on. Should we agree to pay the $20,000?

A: This is a very tough decision you face, and one that many homeowners across the country are wrestling with right now. Many lenders have begun to ask short sellers to sign a promissory note to cover some portion of the shortfall (i.e., the difference between what they owe and the net proceeds of the short sale). While this is totally understandable from the bank's perspective, it has the unfortunate effect of penalizing the homeowners who are trying hard to avoid "walking away" from their homes.

Mindset Management

First off, I commend your efforts to work with the bank on a short sale. For homeowners who are trying to hang onto their homes, the investment of effort it takes to seek a loan modification makes sense. However, I'm not sure the average observer appreciates the level of time, inconvenience and even expense that short sellers go through in an effort to close a short sale -- especially given that at the end, you won't even have the home as a consolation prize. It takes a big man and/or woman to acknowledge that you can't afford to keep your home, no matter how much you would like to do so, and still devote such energy to getting it sold, knowing you won't see a dime out of the sale.

There comes a time, though, when your family must make responsible yet solid, sustainable and sensible financial decisions. This can be very tough, in this context, because you have competing goals. While you want to be as honorable as possible in terms of the commitment you made to your mortgage, your home and even your neighbors, you also want to make decisions that empower your family to begin recovering and thriving, going forward.

And know this -- foreclosure, while unfortunate, is not the end of your world. In fact, I know several homeowners who would argue that foreclosure was actually, in their experience, for closure.

Need-to-Knows

Critical to your decision should be whether the mortgage you're seeking debt forgiveness on is a recourse or no-recourse loan. In states like California, for example, purchase-money mortgages are no-recourse loans, meaning that if you default on the loan resulting in foreclosure, the lender's only remedy is to auction the house at a trustee sale. They cannot come after your personal assets or sue you in addition to or instead of the foreclosure.

In many other states, the lender can take only one action against a defaulting homeowner, either foreclosure or a lawsuit to recoup the loan balance. ...CONTINUED

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