Reasons to Avoid a Short Sale Charge Off

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What Are the Reasons to Avoid a Short Sale Charge Off?

A reader asks, "I'm in the middle of a HAFA short sale, two loans, and my second lender is Green Tree. They call me all the time and beg me to pay. Now, they are threatening me with a short sale charge off. Green Tree is demanding that I make a payment and says if I do not pay by the 30th of this month, my loan will go to charge off. I thought I was not required to make a payment in a short sale, especially in a HAFA short sale. I have friends at work who did a short sale with Green Tree and they were not required to pay. Green Tree says it won't approve my short sale if I don't make a payment. Can they do this? Are there reasons to avoid a short sale charge off?"

Before we talk about a short sale charge off, let's understand one thing about Green Tree. Green Tree is a debt collection agency. The scuttlebutt is that Bank of America, which is a short sale leader, has a financial interest in Green Tree. The fact is Bank of America sells many underwater mortgages to Green Tree, which employs aggressive collection practices. You are not the first borrower to tell me that Green Tree has made empty threats of short sale rejection in an attempt to collect payments.

The question is, can Green Tree send your second mortgage to charge off in a short sale? The answer is yes. The policy at many banks is to send a loan to charge off after a certain number of payments have been missed. That number is generally somewhere between 4 and 6 payments. The loan is sent to charge off as an uncollectible loan.

Bear in mind that once a loan becomes uncollectible, it does not mean the bank cannot collect the loan.

It means the collection agency that bought the loan or the collection department where the loan was sent will now continue efforts to collect on the loan. The loan is simply uncollectible by the entity that transferred the debt. If the mortgage loan carries recourse, the new lender might be able to personally pursue the borrower, even if there is no equity in the security for the loan, as is often the case with a short sale.

Making a Payment to Avoid a Short Sale Charge Off

If you elect to make a payment to avoid a short sale charge off, realize that you might have to make more than one payment. If your deadline for charge off is the 30th of this month and you make a payment before that date, you will probably need to make another payment by the 30th of next month if you have not yet closed your short sale. If you are in the early stages of your short sale, you could be making payments to avoid a charge off for 2 to 3 months, or longer.

If you do not have the money to make a payment to avoid a charge off, it is possible that the buyer of your short sale might agree to make the payment on your behalf. However, some short sale lenders require all of the parties to sign an arm's length affidavit, which probably will declare there are no secret agreements between the parties. So, the buyer might not be allowed to make a payment on your behalf. On top of this, the second lender might not let the buyer to directly make a payment, either.

What Happens If the Short Sale Loan Goes to Charge Off?

If your short sale loan goes to charge off, there are a few possible drawbacks. The best of all worlds is your loan will continue to be processed as a short sale, and the short sale will be granted.

But here are the other obstacles to ponder.

  • The short sale will need to be processed by the new lender/department. This will add time to the short sale already underway. In some instances, you could find yourself starting over on the short sale.
  • The new lender/department might decide it wants more money to release the loan than the previous lender/department requested. The first lender might not agree to increase its contribution to the second lender.
  • The new lender might not participate in your HAFA short sale. If the lender does not participate, then you will not qualify to do a HAFA short sale, and you will not receive a $3,000 incentive.
  • A charge off will appear as adverse credit on your credit report. Of course, a short sale will affect your credit report anyway, so the additional adverse credit might not make a big difference in the overall scheme of things.

    At the time of writing, Elizabeth Weintraub, DRE # 00697006, is a Broker-Associate at Lyon Real Estate in Sacramento, California.