If I was in process of a short sale when I received an inheritance, what happens now?

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If I was in process of a short sale when I received an inheritance, what happens now?

Bought condo in CA for 204K w/ 40K down. I owe $163,000 at6% FHA. Since buying, income has halved and HOA fees doubled. Tried to refinance but was denied by lender. Decided to sell. Appraised at 140-155K. Realtor advised me to stop paying mortgage and do a short sale. I’m now 5 months behind in payments. My mom just died leaving me a 200K inheritance. Realtor said only options now are to keep on paying or foreclose as they won’t do a short sale (or a loan modification) with that kind of savings. I wanted to move and maybe use that inheritance for a house. Do I have to foreclose?

Asked on March 16, 2011 under Real Estate Law, California


SJZ, Member, New York Bar / FreeAdvice Contributing Attorney

Answered 12 years ago | Contributor

1) Make up the past due amount on the mortgage unless you want to take the risk of foreclosure, as well as the risk of damage to your credit rating (a default on a mortgage being reported) and possibly being sued by the lender for any deficiency judgment (e.g. if you owe $163k and the house is sold, after foreclosure, for $110k, the lender may be able to sue you for the remaining $53k).

2) The realtor, btw, was wrong to advise you to simply stop paying--again, stopping paying puts you at legal risk, since you are in breach of your loan agreement.

3) A short sale or a modification are both completely voluntary on the part of lenders--there is no legal right to do them for borrowers, and no legal obligation on lenders to allow them or work with borrowers. Lenders may insist on payment in full. Your realtor is right in that if you have at least $200k and owe $163k, a lender will almost certainly NOT allow you to do a short sale or let you modify your loan. Afte all, why should they--you have the money to honor your legal obligation. (Maybe you don't want to pay it or have other uses for the money, but you *could* pay it.)

Basically, your options are:

1) Keep paying the loan over time, per its terms, until you can sell the house in a non-short sale (or just keep living there);

1a) Keep paying the loan and rent out the house;

2) Walk away from the loan and the house will be foreclosed upon, your credit will suffer, and you may be sued;

3) Declare bankruptcy to get out from under the obligation, though this also has drastic effects on your credit and not all forms of bankrutpcy may be available to you given your financial situation--discuss this with a bankruptcy attorney if you wish to explore this option.

4) Pay off the loan in its entirety; then you can live in the home, sell it for whatever you can get, or rent it. For whatever it's  worth, this is what I personally would do, since by paying it off you are saving 6% on $163k annually--that's a better return than you can get with any safe or even moderately safe investment (you have to get risky in this market to make more than 6%). This option provides a good, no-risk, financial return and preserves maximum freedom of options for you.

However, you have to decide what works best for you, in light of all your finances and also your personality. For example, I am personally debt and risk adverse, which is why I tend to favor using surplus cash to eliminate debt. People who are more debt and risk tolerant, or who need the cash for some important defined purpose (e.g. starting a new business; paying medical care costs; paying for  higher ed; etc.) would come to a different conclusion.

All that said, your options do come down to pay over time per the loan; pay all now; default and take the consequences; or bankruptcy. You can try to get the bank to agree to a modification or short sale, but it is unlikely they will do so givenn your resources. Good luck.

IMPORTANT NOTICE: The Answer(s) provided above are for general information only. The attorney providing the answer was not serving as the attorney for the person submitting the question or in any attorney-client relationship with such person. Laws may vary from state to state, and sometimes change. Tiny variations in the facts, or a fact not set forth in a question, often can change a legal outcome or an attorney's conclusion. Although AttorneyPages.com has verified the attorney was admitted to practice law in at least one jurisdiction, he or she may not be authorized to practice law in the jurisdiction referred to in the question, nor is he or she necessarily experienced in the area of the law involved. Unlike the information in the Answer(s) above, upon which you should NOT rely, for personal advice you can rely upon we suggest you retain an attorney to represent you.

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