Many homeowners would prefer to do a short sale on their home rather than face foreclosure. After all, a short sale does not carry the same long-term credit ramifications as a foreclosure and lets you pay off your debts rather than default on them. Even so, homeowners often worry that they are not eligible for a short sale because there are liens against their property. Can you sell your home in a short sale if there are liens involved? In a word: yes.
The most common types of liens that a homeowner has on a property include:
- A second mortgage
- A home equity loan or home equity line of credit
- A lien placed against the property by the Internal Revenue Service
- A lien placed on the property by the city for maintenance charges or other services
- A lien placed on the property as part of a judgment
- A lien placed by the Home Owner’s Association
- A lien placed by contractors who performed improvement to the house
Even if you have one or more of these types of liens on your property, you still can complete a short sale.
The only kind of lien that cannot be lifted prior to a short sale is a lien related to the purchase of the property. For example, a couple of years ago the government offered a program that granted first-time homeowners an $8,000 credit on the purchase of a home as part of the American Recovery and Reinvestment Act of 2009. Dallas and other cities provided purchase assistance to help with closing costs, but in return the homeowner had to live in the house for a certain number of years. The city would put a lien on the house for that period of time, unless the homeowner paid the money back. At the end of the lien period, the homeowner could then sell the house, turn it into a rental property, or do anything else they pleased.
In this scenario, you cannot negotiate a short sale if you have not paid back the city and are still in that time period where you need to live in the house. Liens for purchase assistance must be paid off prior to a short sale—they are the one type of lien that cannot be lifted. On the other hand, city liens, second mortgages, or home equity loans can all be removed with a well-negotiated short sale. An IRS lien also can be lifted from the house as part of the short sale process. The homeowner will still owe the amount to the IRS, but the lien on the property itself will be removed so it can be sold.
If you have a lien on your property, arranging a short sale is far preferable to foreclosure. Most financial experts agree that a foreclosure should be avoided at all costs. A foreclosure will lower your credit score by 300 points or more and will have to be disclosed on all future credit applications. It is the one black mark on your credit record that can never really be removed. And if your employer or your future employer runs a credit check as part of the employment process, a foreclosure could even cost you your job.
The best option to avoid foreclosure and the financial devastation it causes is to do a short sale, even if you have liens against the property. Not all real estate agents will help you remove a lien. In fact, some agents will try to get you to pay off any liens, which can be overwhelming if you are already in a financial crisis. We can take of them for you, and we have a wealth of experience in short sale negotiations. If we can be of any service, please give us a call.