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If there's one thing sure to complicate a short sale transaction, it's the existence of additional liens against the property. While it's possible -- and even common -- for banks to short sale homes with liens against the title, these liens often mean a much more lengthy and complicated short sale process.
The Short Sale Explained
When a bank or other lender and the mortgagee agree to sell a property for less than the amount owed against it, the transaction is referred to as a short sale. While short sales are often the best way for financially strapped borrowers and lenders reluctant to take on the hassle of a foreclosure and the costs of maintaining a property to come to terms, one complication that can derail the short sale process is the existence of other liens against the property.
Title Liens and Mortgages
Most title liens against homes with mortgages fall into two categories: liens placed on the title to secure additional loans and liens placed against the value of the property in order to satisfy financial obligations in the event the property is sold. Often, removing these liens can mean lengthy negotiations between the homeowner and the lien holders, a process that can delay or even completely halt a short sale of the property. It's a classic case of buyer beware -- while most banks identify and deal with liens before the short sale goes through, it's not unusual for banks to sell properties with liens against the title.
Liens against a property title resulting from additional loans against the property's value are the most common liens encountered in the short sale transaction, and are often the result of second mortgages or home equity loans. If the bank holding the primary mortgage and the home equity/second mortgage is the same, the chances of these liens being discharged as part of the short sale process is higher. When other lenders are involved, however, all bets are off. Other lien holders may require that some or all of the debt owed be paid or that the borrower renegotiate the terms of the debt before releasing the liens.
While second mortgage/home equity loan liens are common complications in the short sale process, they are often easier to overcome than liens resulting from other sources. Common liens placed against a property's title include IRS liens for unpaid taxes, mechanic's liens for unpaid bills resulting from the construction of the home, unpaid property tax liens and even homeowners' association liens. Ideally, the homeowner and the bank would work together to see these liens discharged, but, banks can and often do complete short sales with liens still on the title, because liens of this nature can slip through the proverbial cracks. Buyers should have a title search of a short sale property completed as part of the purchase process.
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