| Every homeowner who is looking to short sale | | | | auctions). |
| their property should be asking the following | | | | The second reason why we advocate SS is that |
| question: "Will I have to pay the bank the | | | | promissory notes and deficiency judgments |
| difference between what I owe and the final | | | | before and after the sale are, for the most part, |
| sales price of my property?" The answer to this | | | | negotiable. In many cases, the deficiency owed |
| is both yes and no. Don't worry, I'll make it simple | | | | can be negotiated to a percentage (ie. 10% of a |
| for you to understand. | | | | Bank of America HELOC loan) or sometimes |
| #1: Let's define terms: | | | | completely waived. The lender may forgive the |
| Foreclosure Deficiency Judgment: A deficiency | | | | balance in exchange for a small pay off or an |
| judgment is a lien against the borrower whose | | | | affordable payment arrangement with the |
| foreclosure does not produce sufficient funds to | | | | borrower. This largely depends on two factors: 1. |
| pay the mortgage in full. It is an actual judgment, | | | | The strength of the negotiator 2. Lender policy |
| that is, you are being sued. Thus, the borrower is | | | | and type of loan. Sometimes, it is even possible |
| liable to pay the difference between what they | | | | to have the buyer pay the difference! |
| owe and what the property sells for, whether | | | | Again, should the lender reserve the right to |
| during the sale or during auction. The option to | | | | pursue a deficiency, at least you have a SS on |
| pursue the borrower is only available if the lender | | | | your credit report vs. a foreclosure. Keep in mind |
| proceeds with a Judicial Foreclosure (basically, the | | | | that it is rare for the lender to actually pursue the |
| lender sues you for the difference). Keep in mind | | | | deficiency and therefore the unsecured note will |
| that in a Non-Judicial Foreclosure, the junior | | | | most likely be replaced with a 1099 issued by the |
| lienholder can still pursue a deficiency judgment in | | | | IRS for the taxes owed on the sale. You will want |
| many states. All of this can be determined based | | | | to explore the Mortgage Forgiveness Debt Relief |
| on original loan documents and/or the type of loan | | | | Act of 2007 to verify whether you are exempt |
| lender. | | | | from this tax. |
| Deficiencies as Unsecured Notes: Deficiencies are | | | | In addition, if the remaining deficiency is pursued |
| realized when the short sale does not produce | | | | by the lender, the deficient amount can, even |
| sufficient funds to pay the mortgage in full. | | | | after the SS, be negotiated down further with |
| Deficiencies are typically:a. Waived in exchange for | | | | the assistance of an experienced debt |
| a pay offb. Accounted for via promissory note | | | | negotiations specialist. Keep in mind, there are |
| for the deficient balance or percentage of the | | | | situations where the lender will absolutely not allow |
| balancec. Collected after the sale as unsecured | | | | a SS unless the homeowner signs a promissory |
| notes, that is, they will not be able to secure the | | | | note for the full amount of the difference. We |
| lien against your other assets (since you've | | | | have recently discovered that BECU will not |
| already sold the collateral property) unless they | | | | approve a majority of their SS unless the |
| actually sue you. Again, unless the lender/PMI | | | | homeowner signs a promissory note for the full |
| collections agency sues you in court and actually | | | | amount (our team has, however, been able to |
| files a "deficiency judgment" against you, the note | | | | negotiate these down to a fraction of the |
| shall remain unsecured. For the most part, lenders | | | | deficiency). |
| will not sue their borrowers as it is more costly | | | | In these situations, I strongly suggest hiring a |
| for them to do so then to keep in unsecured. | | | | professional short sale negotiator to aggressively |
| Lenders often "reserve the right to pursue the | | | | negotiate the balance before the SS as much as |
| deficiency," but what typically ends up happening | | | | possible, then having a debt negotiation specialist |
| is that the unsecured note most likely ends up | | | | pick up the tab after the SS. You will want to |
| being substituted with a 1099 (tax on sale) for | | | | explore these options before considering to file |
| the deficient balance (which they will charge off), | | | | for BK. |
| which most homeowners are exempt from | | | | #3: Finally, let me answer this question in the |
| (Mortgage Forgiveness Debt Relief Act of 2007). | | | | simple terms: "On a SS, will I have to pay the |
| I Think I`ve Been Hit With an Invoice for the | | | | bank the difference between what I owe and the |
| Deficiency/ I think I've Been Sued for a | | | | final sales price of my property?" |
| Deficiency Judgment: No need to fret. There are | | | | Yes: As we discussed earlier, the lender may ask |
| experienced debt negotiation specialists who can | | | | you to pay the difference in the form of a |
| help significantly reduce and ultimately eliminate | | | | promissory note and will not allow a SS unless a |
| unsecured notes and deficiency judgments | | | | note for the full amount is signed by the |
| whether it was incurred via short sale or | | | | borrower or the "right to reserve to pursue a |
| foreclosure. | | | | deficiency" is outlined in a statement signed by |
| Promissory Note: A promissory note is also an | | | | you. In these situations, again, it may be in your |
| unsecured note and a contract between the | | | | best interest to have your SS negotiator bring |
| lender and borrower where the borrower agrees | | | | down the balance as much as possible before the |
| to pay the difference (or a percentage of the | | | | SS, then to have a debt negotiation specialist |
| difference) between the amount owed and the | | | | negotiate the balance even further after the SS |
| sales price of the property. This is usually | | | | (if the deficiency is actually pursued by the lender |
| presented during the sale and can only be | | | | pmi/collections agency). |
| enforced if the borrower agrees in writing. These | | | | No: It is possible, in a short sale, to negotiate the |
| notes are also negotiable after the sale. | | | | deficiency owed down to a percentage that can |
| #2: Let me explain why you are better off | | | | be paid or to even waive the liability completely. |
| avoiding foreclosure. | | | | What this means is that, say, if you owe |
| In Washington state, a majority of foreclosures | | | | $500,000 to your lender but your property sells |
| will be non-judicial, meaning that the lender will not | | | | for $350,000, a strong negotiator may be able to |
| be able to pursue you, the borrower, for a | | | | get the lender to settle at $350,000 and not |
| deficiency judgment. However, in other states, as | | | | pursue the deficiency with the homeowner (in |
| well as some WA. based lenders (ie. BECU) do | | | | exchange for a pay off or sometimes a payment |
| proceed with judicial foreclosures and borrowers | | | | arrangement with the borrower). That means the |
| may be liable to pay a deficiency judgment. | | | | homeowner will be able to walk away from their |
| The number one reason why we advocate | | | | SS (although they may owe the IRS a tax for |
| pursuing a short sale vs. a foreclosure, is that a | | | | the difference, which most homeowners are |
| foreclosure (regardless of whether it is a | | | | eligible for exemption under the Mortgage |
| non-judicial or judicial foreclosure), will prevent you | | | | Forgiveness Debt Relief Act of 2007). A |
| from obtaining a mortgage for a minimum of 5 | | | | negotiator will accomplish this by demonstrating to |
| years, in addition to extensive damage to your | | | | the lender what their losses will be in the event |
| credit, whereas a SS will have far less damage to | | | | that you, the borrower, allow the property to go |
| your credit in that most borrowers will be able to | | | | into foreclosure or if you file for bankruptcy. The |
| obtain a mortgage after 2 years of conducting a | | | | negotiator will argue that it is in their best interest |
| SS. Also, the deficiency (or tax consequences) in | | | | to proceed with the SS, and will present all the |
| the event of foreclosure, if is collectable, will be | | | | market data, financial comparison sheet, etc. in |
| significantly higher than in a SS (since properties | | | | order to make a strong case. |
| sell at extremely discounted prices at foreclosure | | | | |