It is imperative that homeowners understand what might happen if the final sale price for their home is less than what they owe their lenders, the Deficiency. This is even more critical if the property is encumbered by more than one mortgage, in particular if there is a 2nd mortgage or Home Equity Line of Credit.
The likelihood is greater with a Home Equity Line of Credit, as well as some 2nd mortgages that the short sale lender will aggressively seek repayment of their loan. If the funds from the Home Equity Line of Credit or second mortgage were used for purposes other than purchasing or improving the property, you will most likely see the lender making even a greater attempt to collect some or all of the deficiency.
Do Sellers Have To Repay The Deficiency? The Answer Can Be Yes or No:
Yes: As mentioned above, the Lender(s) may ask the seller to pay the deficiency. Meaning that the Lender(s) will not approve the short sale unless a new promissory note for some or even the entire amount due is signed by the seller or the seller agrees to the Lender(s) "right to pursue a deficiency." This is becoming more prevalent when there is a Home Equity Line of Credit or a Line of Credit secured by a second or third mortgage.
In these situations, its best to consult with an experienced Florida Foreclosure Attorney as it may be in the seller's best interest to have our office negotiate with the Lender to bring down the balance as much as possible before the short sale. Once the short sale closes and the seller is free of the secured mortgage, an experienced Florida Debt Negotiation Attorney can work to negotiate the balance down on the unsecured loan even further.
No: As an experienced Florida Foreclosure Attorney we have negotiated a vast amount of short sales with a full release and no deficiency. So, it is possible, in a short sale, to negotiate the deficiency away completely or even have it reduced down significantly and either paid in cash at closing or paid over time at very attractive terms. This is why it's so important to first consult with a Florida Foreclosure Attorney and fashion your bailout.
If the seller is selling an investment property or a second home, many Lenders are now seeking seller contributions at closing. The Lenders often seek a cash contribution at closing of 3% to 10% of the deficiency, though we have also had some Lenders request as much as 30% and/or a deficiency "promissory" note of 5% to 20% of the balance due. Again, every Lender is different, but trends are starting to appear. Keep in mind, there are situations where the Lender will absolutely not allow a short sale unless the homeowner signs a promissory note for the full amount of the difference.
As a Florida Foreclosure Defense Attorney, it is my job to demonstrate to the lender(s) that it is in their best interest financially to close the short sale, accept payment in full, and release the seller from any further obligations to avoid a costly 12-18 month foreclosure defense.
If we can obtain a total waiver of the deficiency, the homeowner will be able to walk away from their property even though they owed more than it was worth. If this occurs, the homeowner may have a tax liability. When a lender forgives an obligation, in this case a portion of their mortgage, the IRS considers it to be income. Thus, taxes can be owed. That said we always recommend that our clients consult their CPA or tax preparer prior to closing the short sale.
Fortunately, the Mortgage Forgiveness Debt Relief Act of 2007 exempts many homeowners from paying any federal tax on mortgage debt that was forgiven by the lender on their primary residence. Please consult with a qualified tax professional in order to be certain that your situation qualifies.
Should Sellers Close Their Short Sale Even if The Lender(s) Approval Requires Signing a Deficiency Note?
The answer is not easy to provide and many factors need to be examined, which is why it's best to consult with an experienced Florida Foreclosure Defense Lawyer before you consider a short sale.
Nevertheless, one consideration may be that a Foreclosure will prevent the seller from obtaining a new mortgage for a minimum of 5 years due to the significant damage it causes to their credit report. With a short sale, and recent guideline changes, a borrower can be eligible for FNMA, FHLMC and FHA mortgages 2 years after the short sale is finalized.
Promissory notes and deficiency judgments before and after the short sale are, for the most part, negotiable. Closing the short sale enables the seller to minimize their risk and cap their losses in the transaction. In many cases, the amount required to be repaid can be significantly reduced via our debt negotiation services. This is not the case with foreclosure.
Deficiency (or tax consequences) in the event of foreclosure, if it is collectable, will be significantly higher than in a short sale due to the fact that foreclosures sell at significant discounts to market value. In addition, Lenders will pass along their legal expenses, property maintenance costs and default interest until the property sells.
There are many cases, where the short sale is far better than a foreclosure, even if the Lender reserves the right to pursue a deficiency. However, you should consult with an experienced Florida Foreclosure Defense Lawyer BEFORE you decide. In addition, if the remaining deficiency is pursued by the Lender, the deficient amount can, even after the short sale, be negotiated down further with the assistance of a Florida Attorney who is experienced in debt negotiation.
Finally, although there is no guarantee of negotiating a short sale with a full release of deficiency, your success rate will increase considerably when you engage a competent Florida Foreclosure Defense Attorney.
Whether you're in foreclosure or not, a mortgage note is a legally binding contract, seek the advice of an experienced Florida foreclosure defense lawyer BEFORE you proceed.