A lifeline is desperately needed for thousands of homeowners in New Jersey who are either behind on their payments or severely underwater with their mortgages. In situations like these, homeowners may see the option of a lender approved short sale as the perfect solution - after all, who wouldn't want their overly-mortgaged property taken off their hands without having to go through formal New Jersey foreclosure proceedings?
Unfortunately, some prior homeowners in New Jersey are finding out the hard way that their liability for the full amount of their mortgage doesn't necessarily end after the short sale - namely because of the existence of deficiency judgments.
Deficiency Judgments in New Jersey
When it comes to short sales, New Jersey considers mortgages "recourse loans." This means that if your lender agrees to a short sale of the mortgaged property, but they end up receiving less from the sale than is still owed on the mortgage, the lender can come after the original homeowner for the difference.
For example, let's say that Homeowner A has an outstanding balance of $300,000 on their mortgage, but is behind on their payments. The bank agrees to take $200,000 from a short sale of the property to Homeowner B. The bank can take the loss of $100,000, but in states like New Jersey they can also come after Homeowner A for the $100,000 difference - however, the bank only has three months to seek this deficiency judgment in New Jersey. To add insult to injury, Homeowner A may also have to pay taxes on the $100,000 since it can be considered income.
In should be noted that New Jersey does have a statute that allows parties to prove the amount of the deficiency as compared to the fair market value of the home. Using the example above, if Homeowner A can prove to the court that the fair market value of the home was $250,000, but the bank only sold the home for $200,000, the amount of the deficiency will only be $50,000 and not $100,000.
Speak with a Foreclosure Attorney
As deficiency judgments illustrate, it is very important to talk to an attorney before agreeing to a short sale. An attorney can help with short sale negotiations - being sure to include a clause in the short sale documents indicating that the bank cannot pursue a deficiency judgment against the borrower. Also, an attorney can advise as to whether a short sale is even the best option for you. Other options, including bankruptcy, formal foreclosures or even loan modifications, may be more appropriate given your circumstances.
