Short Sale Deficiency

Will you Still Owe your Bank Money after a SHORT SALE?

There’s one thing that many people don’t think about when considering a short sale (here’s an explanation of how a short sale works). That is, will you have to pay the bank the difference between what you owe and the final sales price of your property?”

Foreclosure Deficiency Judgment (you are being sued)

A foreclosure deficiency judgment is a lien against someone whose foreclosure or short sale does not produce sufficient funds to pay back the mortgage in full. You are being sued. In this case you can be liable for the difference between what you owe and what the property sells for on a short sale or an auction.

This only happens if the lender initiates it with a Judicial Foreclosure (this is when the lender sues you for the difference). Be aware that in a Non-Judicial Foreclosure, the junior lienholder can still pursue a deficiency judgment in many states. If this happens it depends on the original loan documents and/or the type of loan/lender.

State laws dictate whether the lender has a recourse or non-recourse loans. Sometimes a first mortgage is a non-recourse loan, but second and subsequent mortgages are recourse loans. When negotiating a short sale, you can require that the bank waive its right to a deficiency judgment. Make sure you have a good hardship letter and that you request a deficiency release from the bank.  Again, the bank may or may not choose to do so, but it’s worth a shot.

What are the possible outcomes of a short sale deficiency?

1. The deficiency is waived in exchange for a payoff.

2. The deficiency is covered via a promissory note for the deficient balance or percentage of the balance. This is where you promise to pay back the amount still owed.

3. Paid after the short sale as an unsecured note (a loan without collateral – since the collateral you had – your home – is now sold). The lender will not be able to secure the lien against your other assets unless they actually sue you. Unless the lender or other lien holder sues you in court and actually files a “deficiency judgment” against you, the note remains unsecured.

In future posts I’ll go into even more details about what can happen in a short sale when the selling price doesn’t cover the remaining mortgage amount.