Short Sale Deficiencies

Short Sale Deficiency Forgiveness

The most beneficial aspect of a short sale comes in the form of your ability to potentially erase negative equity. The forgiven debt that you may realize in a short sale can amount to an increase in your net worth of tens of thousands of dollars. We’ve even helped some homeowners who were able to erase half a million dollars in negative equity... money that our clients used to owe, and now they don’t.

Obviously, that much money can make a world of difference to your financial future, so it’s certainly one of the primary concerns & benefits to be discussed.

What is a Short Sale deficiency?

We’ll assume that everyone understands the basics of what a short sale is and what it can do for you. If you don’t then please take a moment to watch this video to learn more. This video will explain the basics and then, you can come back to this page with a better understanding of what the below means to you.

As the video describes, the deficiency is the difference between what you owe on your mortgage and what you are able to pay your bank from the proceeds of the sale of your home (not out of your pocket).

With regard to that deficiency, your bank has 5 basic options which they may offer in connection with your short sale:

  1. They may reserve the right to collect on the deficiency after closing
    • They may initiate collections action immediately after the short sale or wait several years until you have recovered financially.
    • This is not a great option, but oftentimes it’s better than foreclosure because, in foreclosure, you may still owe the deficiency, they may still collect on it, AND you’d also have a foreclosure on your credit.
  2. They may ask that you pay all or a portion of the deficiency at closing
    • If they ask you to pay 100% of the deficiency, then this is essentially a short sale declination. Don’t worry, if we pre-qualify you for a short sale then this is almost certain not to happen. Complete short sale rejections are very, very rare with The LAMB Group’s clients.
    • If they ask for a portion of the deficiency to be paid, the amount they require usually equals whatever liquid assets you have, for example, in a savings account. If you have no readily available liquid assets, it is rare for the bank to ask for repayment at closing.
  3. They may ask that you pay a portion of the deficiency as installment payments, after closing
    • This happens by virtue of an unsecured promissory note that they require to be signed at the short sale closing. This essentially converts the balance of your secured mortgage (the deficiency) into a personal loan that you agree to repay. Many times, these are low interest or no interest loans over a period of 5 or 10 years.
    • Although this is not an excellent outcome, it’s still better than a foreclosure where you may end up responsible for 100% of the deficiency, all at once. Plus, generally, the promissory note required is less than the full amount of the deficiency so in those cases, homeowners benefit from the majority of the deficiency being forgiven in exchange for agreeing to be responsible for the remainder.
  4. Forgive all or a part of the deficiency at the closing of your short sale
    • A full forgiveness of 100% of the deficiency is always the goal and, in fact, the vast majority of The LAMB Group’s clients do experience a FULL forgiveness of their deficiency at closing. This is, by far, the most common result of a short sale with our firm.
    • Partial forgiveness, if offered at all, is usually offered in connection with #2 or #3 above.
  5. A combination of 2 or more of the above
    • If they don’t forgive 100%, they may choose a combination of partial forgiveness, payment at closing and/or installment payments after closing.
    • For example, on a $100,000 deficiency, the mortgage bank may forgive $90,000 and then ask you to pay $1,000 at closing. Then, for the additional $9,000, they may ask you to pay that in $75 monthly installments over the next 10 years.

The LAMB Group at RE/MAX Metrolina, working in partnership with licensed attorneys, will present your case to the bank in a way that will encourage them to forgive 100% of your deficiency at closing. As we said above, this is the outcome for the majority of our clients and so, hopefully, this will be what you could expect as well.

If you’d like a better idea of what to expect, submit your question using the form above, or call one of our short sale specialists today. We can usually answer this question with reasonable certainty in just a few minutes.

To forgive or not to forgive, how does the bank decide?

Your mortgage bank will determine which of the above five options they choose based primarily on the following criteria:

  1. Your monthly income today
    • If the bank feels that you have enough money to pay all of your bills and that you still have surplus funds left over at the end of the month, they may ask for installment payments towards the deficiency.
    • b. To avoid this, it is important to show the bank exactly why you’re struggling every month, in terms of dollars and cents. It’s important for them to understand that you simply can’t afford the payments on any type of additional installment loan.
  2. The amount which they estimate to be your potential income, in the future
    • If the bank feels that your hardship is temporary, or if you’re in a line of work that’s in-demand, the bank may believe that your financial recovery is imminent. For this reason, they may not offer you a highest and best result because they believe, at some point in the future, you’ll be able to pay them.
  3. They may ask that you pay a portion of the deficiency as installment payments after closing
    • This happens by virtue of an unsecured promissory note that they require to be signed at the short sale closing. This essentially converts the balance of your secured mortgage (the deficiency) into a personal loan that you agree to repay. Many times, these are low-interest or no-interest loans over a period of 5 or 10 years.
    • Although this is not an excellent outcome, it’s still better than a foreclosure where you may end up responsible for 100% of the deficiency, all at once. Plus, generally, the promissory note required is less than the full amount of the deficiency so in those cases, homeowners benefit from the majority of the deficiency being forgiven in exchange for agreeing to be responsible for the remainder.
  4. Your total assets and their combined value
    • If you own other real estate which has equity or if you have (for example) a yacht that’s paid off, the bank may look at these items as a means for them to be repaid one day. They could conceivably attach a lien to one or more of your assets and force you to repay the deficiency in the future.

Why do banks forgive deficiencies?

There are several reasons that banks choose to forgive tens of thousands of dollars in unpaid debt. However, the two primary reasons are both related to a cost savings for them.

First and foremost, if the bank made it a habit to never forgive deficiencies then vastly fewer people would take advantage of the short sale option. After all, who wants to go through a short sale only to find yourself still owing money?

Well, there are several good reasons to do a short sale, even when the deficiency isn’t forgiven. But the general thinking for many people, even when it’s not true, is that a short sale just isn’t worth it when the deficiency isn’t forgiven. So, if the banks didn’t offer deficiency forgiveness, more people would allow their homes to be foreclosed upon and the bank would lose even more money than it would in a short sale.

Then, there’s the tax savings. If the bank holds onto your note and requires repayment of the deficiency in the future then that is still considered an asset for them. Whether you’re paying or not, you owe them the money and so it’s considered to have value. If they write off your loan, thus forgiving the debt, then it is viewed as a business loss to the bank. And since losses can be written off in their own taxes, it saves them money with the IRS.

Finally – it just doesn’t look good for banks to have bad debt on their books. They have to make a case to their investors for the financial stability of their organization. Writing off debt doesn’t look good but at least it’s a one-time problem that goes away in subsequent years. By holding your debt open, it sits on their books and continues to make them look bad, for years to come.

Hopefully you can tell by the content of this page, that we know a lot about this subject. After all, The LAMB Group has helped thousands of homeowners with short sales and we’ve seen just about everything. We can’t guarantee any specific outcome in any transaction but we can promise you this: If you choose to process a short sale with our firm, you will have the best possible chance of obtaining a full forgiveness of your deficiency that exists with your specific mortgage and your financial profile.

And, if the terms of your short sale approval are not acceptable to you, we will always ensure that you never have to make a decision that you do not want to make. For more information about your chances of having your deficiency forgiven, call one of our specialists today.