What Happens With the Short Sale Deficiency Balance? Part 2

Comments (5)
June 22, 2008

A short sale on your home will result in a deficiency balance and is often handled in one of three ways as outlined in the previous episode of this show.

While your lender can, and often will, put in writing that upon completion of the short sale and them receiving the indicated payoff that the case will be closed and that they will not pursue for any additional funds in the form of a judgment for this deficiency balance, it is often overlooked that there is an additional party involved if you have mortgage insurance on your mortgage.

Just because the mortgage company says they will not go after you for any negative amount, that does not mean that the Mortgage Insurance company, who’s the one that will ultimately be taking the hit, will do so as well.

Often I find that this point is overlooked or misrepresented. I came across a GREAT Businessweek blog post the other day (Click here to read the Hot Property post as it’s full of good tips ) that I felt did a great job answering a lot of questions sellers have but on this issue there seemed to be a haze of confusion.

I made the point that mortgage insurance is similar to title insurance in that you are making a promise that…well…you should watch the video above. I can explain it there far better than I can type it out.

Feel free to leave a comment below if you think I’m missing the boat on this one, if you know someone that ran into a similar situation, or if you have questions in general.

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5 Comments, Comment or Ping

  1. lori

    Are you familiar with laws in Florida? I have PMI insurance. I owe 154K on condo and it is valued at 75K. Can you recommend a realty in florida that is experienced in handling these transactions? Do you suggest I hire an attorney?

  2. I am not familiar with how things work in Florida.

    Hiring an attorney would be on the safe side, but you need to do some investigating to find out if there are any that specialize in this type of negotiation. I find that few do.

    There are more real estate agents and loss mitigation professionals that know a lot more about mortgage negotiation than an attorney, but because of the law degree, a less qualified person will often be trusted with the job.

    My suggestion is ask around at real estate offices about this and find someone you can trust who has a track record.

  3. Amy

    Thank you so much for putting this info out there!! We are about to close on a short sale and radian is wanting a note for 60k!!!! Where is this number coming from? The loan amt was 403k, we have already paid 86k, and the buyer is paying 278! Something does not add up and definitely not 10-25% of loss!! The lender paid pmi on the loan so how can we get these details? Agent and negotiator telling us we can’t negotiate this amount! Please help!

  4. Amy,
    Here are some quick points:

    1) Your lender doesn’t pay the PMI…you pay it in your payment to protect the lender. What a scam.

    2) PMI companies have a say in the short sale. In the end, they are either going to cover the loss to the lender by cutting a check or they can buy the property from them in whole and try to sell it themselves. Either way, it’s their butt that’s on the line for the most part.

    Radian is the worst. They ALWAYS ask for a soft note like you described. Unfortunately, there is little you can do. If the house goes to foreclosure, Radian is going to get the house. In their statistical model they believe that if they ask EVERY short sale applicant for a soft note that is a certain percent of the loss then a certain percent are going to go for it AND actually make the payments. Some won’t. But according to their computer, they’ll lose LESS by asking for these soft notes consistently vs. not trying to get money at all.

    Negotiating with them on this doesn’t work. They’ll consider you one of the ones in their mathmatical model that says no. An acceptable loss. They’ll hold the line.

    It’s easier to agree to it and close the deal, make payments for 3 mos then call once it’s transferred to a different department and try to negotiate the rest down from there.

  5. Mike

    Hi,

    Im curious about an issue I have as a seller of a short sale home. The day before closing the mortgage company called and informed me I would have to sign a promissory note for $ 12K to close the sale. At this point I had no choice and did so. This was three years ago and after working with my credit I have finally got the original mortgage item removed. But the item remaining is being called a second mortgage with or without collateral. I have written the mortgage comany disputing this and the only respond back to the original mortgage, not responding at all to the prommisory note. Any ideas if or how to get it display correctly on my credit reports ?

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