What Happens With the Short Sale Deficiency Balance? Part 3

Comments (8)
June 23, 2008

Here we wrap up our 3-part series outlining the major points concerning a short sale deficiency balance and what you need to be thinking about when faced with one.

It’s important that you do watch all 3 videos if you are going into a short sale situation because the deficiency balance is going to be handled in one of thee ways. In my experience you have about a 45% chance that once the bank agrees to allow the short sale to proceed, they won’t do so without you reassuming some (if not all) of the negative amount that is left over after the short sale.

In this video I give you a horror story that happened on a short sale an associate of mine was working on . We’ll also go over the fact that when required to reassume some portion of this negative amount, it might not be such a bad deal after all.

Do you have a story of your own to share? Perhaps Wells Fargo put a gun to your head and required you to promise to pay back every last time or they were going to deny your short sale application? Let me know in the comments below.

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8 Comments, Comment or Ping

  1. Ed

    what are the typical terms that lender requires when signing a note for any deficiency balance? is there a maximum number of years, will they normally give a favorable rate? so might the lender do a 30yr unsecured not at 5%?

    if it is the hybrid scenario how might the forgiven debt reflect on credit?

  2. Ed,
    Typically I find that the bank puts the repayment terms on a 10 year plan. Rate USUALLY goes down to 0%, so you’re basically paying back all cash.

    Somethings a rate is in effect, but usually it’s not higher than 5.5%.

    HELOCs are different. The debt is often not forgiven and there is no change to the rate. The bank just releases the lien that ties the HELOC to the house and it becomes freestanding debt and whatever payment terms were in effect stand.

    I don’t know how things will effect credit in the Hybrid scenario. To be honest, I have not had any clients ask me to pull their credit a few months later and check.

  3. Ed

    Brian would you recommend that I contact my lender to initiate the short sale process or should I speak with a Realtor first? I am relocating for work and will not be able to afford rent in the new city and the mortgage on the current home. I am in FL where prices have plummeted…

  4. Ed,
    I would contact your lender first, immediately followed by a call to your agent.

    Some banks will not work with you under you are a certain number of payments behind, and you never know if YOUR bank is operating on this policy with your particular loan unless you call.

    Starting paperwork and exploring options with your agent is a wast of time if you have to wait until the end of February before your bank will even THINK of working with you.

    Once you do know if they will work with you on a short sale, get in touch with your agent asap. The process is long and the sooner you can get started the better.

  5. Alex

    Brian, would the seller be liable for the missed mortgage payments during the short sale process or would that just be bundled in the deficiency amount? The short sale is in Maryland.

  6. These types of details are going to be worked out with the bank. There is no hard and fast rule that the banks have to follow or adhere to.

    In most cases the bank is going to make issue a net settlement letter that states that they approve the short sale as long as the bank received X dollars by X date and time.

    That being the case, little stuff like missed payments, late fees, BPO value checks or appraisals…pretty much anything added to the mortgage account are wiped out.

  7. Pat

    Brian,

    If you’re doing a short sale and credit is already going to take a serious hit, why would you agree to do a short sale and agree to pay back the deficiancy. Wouldn’t make since to just let the bank forclose?

    Just curious.

    Pat

  8. Pat,
    In general, the answer to his is “No.” It all comes down to the lesser of two evils.

    In the world of personal credit, a foreclosure is the worst mark you can get. It’s significantly worse than a Bankruptcy. Avoiding it at all costs is usually in the best interests of the homeowner.

    Some people will agree to pay the deficiency, sell the home on short sale, and avoid the foreclosure. The entire time they knew they couldn’t afford to pay the deficiency note…so they pay it for two or three months and then stop.

    At that point, if the deficiency balance note is reporting on the credit report, it begins too make some trouble. Eventually it might end up being charged off and/or reported as a collection.

    Both charged off accounts and collection entries on credit reports are significantly less harmful than a foreclosure entry.

    So it all comes down to going with the lesser of two evils.

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