The following is not to be construed as legal advice. Consult an attorney.
First, it depends on which state the property is located in. There are some states with anti-deficiency statutes that preclude banks pursuing the remaining balance on the loan (the legal term for the remaining balance is “deficiency”). However, anti-deficiency statutes are not common, so this question will often require another level of analysis.
Next, it will depend on the investor of the loan. Loans that are backed by Fannie, Freddie, FHA, and VA will allow for a full waiver of deficiency upon completion of the short sale and full compliance of the terms of the short sale approval. However, there are some narrow exceptions that may require the seller to make a cash contribution at closing to offset a sum of the outstanding balance in order to be granted a full waiver of the rest. These requested cash contributions are the exception to the rule and can even can be countered by the seller in some circumstances.
Finally, if a private investor has backed the loan, the waiver of deficiency will depend on that particular investors policy. Some privately held banks will negotiate the deficiency on a case-by-case basis. Although policies can vary, most of these private banks will primarily focus on the seller’s financial position in determining whether to waive all or part of the deficiency.
Solution: Short Sale. Get the lender to accept an amount below the mortgage payoff and waive the deficiency against the homeowner. In most cases, all closing costs are built into the deal where the lender pays the closing costs. Lenders generally demand fair market value for the property – which in a short sale is significantly below the mortgage balance.
A Short Sale offers a fresh start, eliminating debt, while minimizing damage to credit and avoiding eviction proceedings.
A real estate agent cannot give legal advice as to deficiency judgments or if there will be a complete release of liability or pending foreclosures, stopping foreclosures, interpreting bank approval letters, tax advice, otherwise the agent begins to negotiate legal terms which result in a legal settlement that is binding against the homeowner. . . and can put the homeowner at grave risk. . . which is the practice of law. Giving advice as to legal issues from a nonattorney is the Unauthorized Practice of Law, a Class 1 misdemeanor. Furthermore, ones Errors and Omissions policy would typically exclude any unauthorized practice of law.
- Prequalifying the homeowner
- Assemble excellent lender packages
- Directly and immediately respond to negotiators’ calls and emails
- Immediately provide well-written market narratives and critical analyses proving price
- Ensure that appraisers and bank BPO agents understand the subject property’s challenges
- Immediately provide additional documentation required by the lender
- Keep the parties well-informed and in the deal
- Document all tasks in detail for transaction-saving reference
- Provide creative solutions to banks’ demands such as promissory notes and cash contributions
- Applying 17 years of negotiations skills to ensure success
Short sales may take longer to close than more conventional sales, so plan accordingly. However, it is well worth it. Again, the alternative – foreclosure.
- Lenders cannot consider a short sale if the borrower is in an active bankruptcy. The bankruptcy would have to be discharged or dismissed prior to the lender considering a reduced payoff.
- There are many bankruptcies that are filed to save a homeowner from the deficiency judgment or shortage in the sale of their home – when really all they needed was a short sale of their home!
- A bankruptcy stays on the homeowners credit report for 10 years.
- Bankruptcies typically only delay the inevitable. . . a foreclosure. Then the homeowner has both a bankruptcy AND a foreclosure on their credit report. The worst case scenario for anyone.
- The lender can still pursue the former homeowner with a Judgment for any deficiency after the property sells under foreclosure which is typically 25% more than the deficiency resulting from a short sale if it is not waived. This foreclosure deficiency tacks on attorney fees, costs to sell the property, property preservation fees, insurance, taxes, and the like.
- Foreclosures eliminates the chance of a homeowner to repurchase another home for years after a foreclosure is reported on one’s credit. So, realtors are excluded from the foreclosure process and transactions, plus they have just lost another potential buyer of another home. . . for years.
- From the lenders standpoint – see Loss Severity Rate above! Enough said.
It is NOT too late! With a team of experienced professionals on your side, you can get a foreclosure sale canceled or postponed to allow time for short sale approval. Banks are generally able to recover more money in a short sale than a foreclosure sale, so the bank will often benefit in a short sale as well.
However, time is of the essence when the foreclosure process begins, so you must act quickly. A qualified attorney should be involved in the transaction immediately!
• You must have a genuine drive to succeed in the process. A motivated seller is far more likely to receive a favorable outcome than one who is unmotivated.
• You must have a team of professionals experienced with short sales working with you including a real estate agent and attorney.
• Finally, you must take care of your property. The condition of the home is YOUR responsibility until the closing is complete!