When you owe more on your home than the property is worth on the market, you may consider a short sale as a way to avoid foreclosure. This means the property is sold for less than the outstanding mortgage.

Here’s an example of a short sale scenario: You owe $300,000 on your home and cannot keep up with payments. Selling the home wouldn't fix the problem, since the real estate downturn means that your home can now fetch only $260,000 on the market. You don't want to go into foreclosure, since you know that the drawn out process can negatively impact your credit score. If you find a buyer to pay $260,000 for the home, you can ask your mortgage lender to approve a short sale. This benefits the lender because although they would lose approximately $40,000 on the loan (closing fees not considered), they would get back a significant amount of what was owed while avoiding the time-consuming and expensive foreclosure process.

If there is more than one mortgage on your home, a short sale comes with added hurdles. Multiple mortgages dictate that a short sale can only proceed with the approval of each lender. Gaining approval and fostering agreement among lenders can pose a substantial challenge. As debt collection goes, the lender that provided your first mortgage is in the priority position to collect the proceeds from the short sale. Though they may be tempted to take all of the proceeds, they likely will have to offer a portion to the lenders that provided the second or third mortgage (junior lienholders) to get them to release their liens on the property and agree to the sale. If a second mortgage is worth $30,000, the first lender from the above scenario may offer to pay only $5,000 for releasing the lien. A third lender may be offered $3,000. This leaves the original lender with $252,000 of the $300,000 owed. Negotiations between lenders will continue until an acceptable deal is reached, or the short sale may fall through.

Despite the bad deal that junior lienholders receive from short sales, collecting something is better than collecting nothing. Disapproving of a short sale and sending a home into foreclosure could result in a second or third lender receiving no compensation at all, so there is an incentive to find a way to make the short sale work. Furthermore, foreclosure is often expensive and time-consuming for lenders, making it an unfavorable option.

At the Law Offices of James C. Zimmermann, we provide short sale guidance for clients in New Jersey. We are an accomplished foreclosure defense firm with offices in Hackensack, Vernon, Wayne, Pompton Lakes and Nutley. To secure qualified legal representation during the short sale process, call us at  973-764-1633 or contact us online.