Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales
Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales
December 30, 2016

There is conflicting information on the web regarding loans and every business owner should not swallow whatever information they see, hook, line, and sinkers without first of all verifying from their financial experts. It appears that a few of the financial articles online are designed to create false impression short sales which are not a good thing for businesses.

There are rules to keep in mind when it comes to deficiency

These rules have been there for a long time and have remained relevant. Some of them are well-established rules under the law while others are more like a guiding principle that have remained relevant over many years. The rules follow thus;

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1. A borrower cannot be sued on the sale of a residential property

To begin with, a residential property is defined as any property that is less than or equal to two and a half acres used as a residence for one or two families. Assuming a residential property has been sold at a trustee’s sale and there happen to be a deficiency balance on the loan that was fore closed, the borrower cannot be sued.

2. Purchase money loan is witnessed in some short sale transactions

When a residential property secured by a mortgage or deed of trust has been sold, and the proceeds of a loan are used to make the purchase in part or full, the borrower cannot be sued for deficiency notwithstanding whether a foreclosure sale occurs. This is the type of referred to as purchase money loan and it is encountered in some – not all – short sale transactions.

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3. A borrower can be sued directly in home equity line of credit

In the earlier cases, we have seen that a borrower cannot be sued directly but in the case where a home equity line of credit loan has been secured by a mortgage or deed of trust on a residential property and the proceeds are diverted to something other than purchase price, the borrower can be sued directly for any deficiency. Short sale needs to identify these types of loans and deal with them.

It is not always clear if a loan has been properly classified or not

Applying the aforementioned rules is not always an easy task because it is hard to tell, most often, if a loan has been properly classified as purchase money or non-purchase money. There have cases on this issue brought before the court. A popular case happened in 1997 and after much deliberation; the law court dismissed the lawsuit brought against the borrower.

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The 1997 case was thrown out for two main reasons

The first reason the court cited was that the lender failed to acknowledge the fact that the loan could be separated into two components namely the purchase and the non-purchase money. The second reason was that the same deed of trust secured the new note as well as the original purchase note.

Some lenders have made attempts to go around the anti-deficiency statutes

In a bid to go around the anti-deficiency statutes, some lenders are either demanding that the seller or borrower execute a new promissory note or create a new agreement into the old in which they agree to remain liable for the claimed deficiency. This makes the review of short sale document significant.

The rules on anti-deficiency statutes are complex

It is obvious that the rules on anti-deficiency statutes are not easy to understand, however, the application is straightforward. It is, therefore, paramount that a property owner thinking of a short sale seeks legal advice to avoid issues after the sale.

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Article highlights

  • Business owners should not trust all information on the web.
  • The anti-deficiency law is a little bit complex.
  • Property sellers who seek short sale should seek legal advice.
  • The terms of most loans are not properly defined.
  • Certain rules remain relevant when it comes to deficiencies.
  • A residential building should not be more than two and a half acres.
  • Purchase money loan is often witnessed in short transactions.
  • Some lenders are looking for ways to go around the anti-deficiency statute.
  • Lenders can lose a case against a borrower if they fail to acknowledge the different parts to their loan.
  • Some lenders insist that borrowers insert new promissory agreement.

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