Typically, no, the mortgage lender cannot lay claim to the assets in one’s retirement account. We have been involved in hundreds of short sales, and we have never seen a mortgage lender claim any funds out of a seller’s retirement account.
There are ways that the retirement account can affect whether one is approved for a short sale. In making their decision on whether to approve a short sale, a lender may note how much money is in the retirement account and then ask the seller to sign a promissory note to repay some of the debt. Even though the lender does not ask for a monetary contribution from the seller at settlement, and even though the lender agrees to forgive most of the remaining debt, they may expect the seller to repay some debt in the future. The promissory notes we have seen typically do not involve any interest, and they have ranged from as little as $1,000 to as high as $40,000. In other words, the lender knows that the borrower does not have funds now but could have access to retirement funds in the future.
A person’s retirement funds could be indirectly affected by the filing of a judgment. For example, if a lender obtains a deficiency judgment against a former borrower, that judgment sits on the public record for a time, and it can be renewed by the lender. Eventually, if the person wants to borrow money or sell a house in the county where the judgment is filed, they probably will have to pay off the judgment or reach a settlement agreement to remove the judgment. The person could potentially use money disbursed from their retirement account to pay off the judgment. A factor to consider is how many years away from retirement the person is, as someone closer to retirement has to deal with the possibility of having a judgment that they may wish to pay off.
In theory, a lender could issue a short sale approval and ask the borrower to contribute some money at closing. The lender may be aware that the person has no liquid funds but has some funds in their retirement account. Some accounts allow a person to remove some money, but it comes with a penalty. Therefore, it is possible that a borrower may choose to have their retirement fund release some money early just so the person can cover a contribution at closing and perhaps their moving costs.
It is important to understand that the mortgage lender’s remedy for a defaulted mortgage loan is to foreclose on the property. The lender’s claim is against the property, not against the person’s retirement account. If the person needs money and chooses to take some funds from the retirement account to cover immediate expenses, then that is their choice and not the lender’s decision.
State laws can vary regarding a creditor’s claim to personal assets. Consult with your attorney and/or tax advisor.