I get asked a lot of questions from homeowners, but one that I am hearing more and more is, “What happens if I short sale, but the lender doesn’t issue a full release of deficiency?” I am hoping that I can shed some light on this question, and then expound on the answer a little. It’s a bit of a gray area so hopefully this will help you be informed about these possibilities.
Basically, we always seek a full deficiency release when we negotiate short sales and there are government programs that help protect the seller from judgments. Every short sale is different based on the amount of money the bank has lost and the homeowner’s financial situation. There is no way to guarantee that you will get a full release, but 90% of the short sales we have closed received a full release. This is due to the fact that we understand the guidelines the short sale lenders use. Knowing and understanding the guidelines helps us protect our sellers from judgments. Our goal is to protect you the best we can and keep you from bringing any money to closing.
The lenders have 7 years to try to collect deficiency judgment, and quite frankly it’s just not financially beneficial for them to do so. It’s not as easy as sending you a letter asking for the rest of the money that you owe; it involves a lot of time, effort, money and often, litigation. In MOST cases, the amount that it would cost them to try to recover their losses from your home would end up costing them double and that just doesn’t make sense economically. Most deficiency judgment debt is sold to collection companies that will settle with you for pennies on the dollar. The debt that they are seeking is now unsecured and harder to collect on.
Additionally, you might qualify for the HAFA Program. The HAFA (Home Affordable Foreclosure Alternatives) Short Sale Program helps homeowners who want to avoid foreclosure by offering financial incentives to borrowers who successfully complete a HAFA short sale. If you qualify, you will be given full deficiency release and you will receive $3,000 at closing!
So, let’s say that you’re in the small percentage of people who didn’t get full deficiency judgment removal. You are still much better off than going into foreclosure or bankruptcy. Foreclosure and bankruptcy are going to ruin your credit for 7 to 10 years and the lenders can come after you for the full loan amount PLUS attorney fees and the court costs for the foreclosure. Most lenders will settle for around 10% to 15% of the note amount. Don’t forget that when you sold your home, some of that amount was paid down for you reducing your overall debt. Also most lenders will work out a plan in the form of an unsecured note, for interest only for seven years.
I hope that this has cleared up any confusion that you might have had about the full deficiency release on a short sale property. If you have more questions or would like us to short sale your home, please contact us! We’ll be glad to talk to you and help in any way that we can.