If you sell your home for $200k less than your mortgage, what happens? Does the bank pursue you for the rest?

Question

If you are forced to sell at a huge loss, well below what you owe, does the difference follow you the rest of your life? Does the bank forgive the difference? Do you have to declare bankruptcy to get rid of the huge amount owed? What does someone do?

Answer 1

Dear Marty,

              You are not going to sell your home for $200,000 less than is owed.... At least you will not do so without the banks consent. The true ownership in real property is with the lender, also referred to as "the legal owner". While making payments or prior to foreclosure by the legal owner you are "the equitable owner" of the property. You cannot legally transfer your property without the consent of the "legal owner"

because by attempting to do so, requires your transferring greater rights than you possess.

      If you transferred your "equitable title" to a new buyer, that buyer would take subject to the entire mortgage on the property. This, they will not do because by still owing this amount, they are not purchasing the property for below what you owe!

       I have had a great deal of recent experiences with short sales in Southern California. I find the lenders either hostile or incompetent. I am aware of only a handful of transactions that worked out of hundreds attempted.

      If you lose your property to foreclosure, the right of the bank to proceed against you depends upon the state you live. Also important if the house was your primary residence or a second home.

       In many states, property used for a primary residence that is foreclosed upon by summary foreclosure proceedings (A shortened statutory

procedure) as opposed to a judicial foreclosure

(A complete legal proceeding requiring months and attorneys) are free from anti-deficiency judgements (A judgement between the amount of the foreclosure sales price and the amount of the loan).

      Bankruptcy should be unnecessary. A peculiarity in the law is that if this were a vacation home or mere investment property, you could file a Chapter 13 reorganization bankruptcy and Courts are empowered to cram down lenders so that the value of the mortgage (Amount of loan) is no greater than the present market value. Thank your U.S. Congress and its special interest driven membership for not allowing the same benefit to be provided owner occupied property.

       Relax and take a deep breath.... Lots of people in your same place. You need not look for a window ledge. On the outside chance you live in a rare jurisdiction that allows deficiency judgments, you can file a Chapter 7 liquidation to rid yourself of the majority of continuing long term debt.

       NO YOUR DEBT WILL NOT FOLLOW YOU THE REST OF YOUR LIFE. A competent real estate broker should inform you if your State allows deficiency judgments in common foreclosures. My guess is the answer is a resounding "NO". But in the event your answer is not an unequivacal "NO", ask an attorney and even be willing to purchase one-half hour of time.

HE/SHE  NEEDS NO PAPERS TO REVIEW. Just a simple question regarding state law.

You will be fine.

Best Wishes.  

Answer 2

The best thing to do is to negotiate with the loss mitigation department at the bank to accept less than what is owed.  This is called a short sale.  Find a realtor with experience doing them.  The remaining balance doesn't just disappear otherwise.