Under what conditions does pursuing a short sale make sense?

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Under what conditions does pursuing a short sale make sense?

I’m pursuing a short sale of my home. I have a primary mortgage and a HELOC. I have a buyer and the lenders have approved. However, the HELOC lender has asked for a payment at settlement that is less than my balance but funds would only be available through my 401k. Should I consider a deed in leiu or foreclosure instead, or would I be liable to lose more financially. Would my 401k and income be protected if we claimed bankruptcy?

Asked on June 16, 2011 under Real Estate Law, Maryland

Answers:

M.T.G., Member, New York Bar / FreeAdvice Contributing Attorney

Answered 10 years ago | Contributor

Ok so as you know HELOCs are subordinate to primary home loans. This means that the HELOC lender has claim to any money generated by a foreclosure, only after the primary mortgage lender recoups their full loss. Second, almost all HELOCs are considered “recourse loans” meaning that you are personally responsible for paying the loan in full regardless of the property’s value. SO the lender can sue you borrower for the remaining money owed after foreclosure by any means available for a judgement creditor in your state (which means garnishment of income as well).

Is it possible to get the HELOC lender to forgive the loan?  If they do then the amount may be included in your taxable income for the year.   If the HELOC lender will not forgive the loan entirely can you negotiate the amount they will take?  They rarely agree to short sales (and they must along with the primary lender) because then they never see any money.  I would not dip in to your 401K.  It is protected from creditors and bankruptcy.  Get some counseling before you decide anything.  And hone your negotiation skills.  Good luck.


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