How To Negotiate & Waive a Short Sale Deficiency Balance
Hello! Lately, I’ve been receiving a HUGE influx of questions & concerns on what to do regarding lenders and their unwillingness to waive short sale defiencies, so I’d like to revisit this topic with a couple key pointers on how to negotiate, reduce & ultimately eliminate a deficiency after a short sale.
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Now one thing that I am not going to do is give you legal advice on this blog. If you want to hire legal advice for more personalized consultation, first of all, do not hire an attorney for $300 an hour. Use Pre Paid Legal, which gives you unlimited consultation with a top tier attorney in your area for a measly $16 a month. I use this service myself. With short sales, rarely will you need physical attorney representation. Rather, you need consultation, and that comes a lot cheaper.
Plus, Pre Paid Legal attorneys WILL write letters & make phone calls for you, if it is necessary to do so.
Before you even consider a short sale, first ask yourself, do you want to keep the property? We’re not in the business of forcing people to do short sales if they’re desire is to keep their property. Have you considered a loan modification?
If you really want to keep your home, there are plenty of other options to consider. Did you know that it is possible to file for BK, discharge a large 2nd and modify your first mortgage which would instantly “recreate” equity in your property while leaving you with a significantly lower payments AND a lower mortgage balance then you originally had on the property? Ask a loan mod expert about this option
Now, in order to negotiate & waive a short sale deficiency, you must have the basic following:
1. A professional negotiator
2. A complete short sale package with an offer
3. Updated financials
If you do not have these basic things, you’re going to run into small, administrative issues that’s going to keep you from talking about what’s most important in a short sale (ie. the deficiency).
Now let’s talk about a couple things you need to understand before attempting to negotiate & waive a short sale deficiency balance.
First, how many mortgages do you have? If you have only one and you live in a non-judicial foreclosure state, you have the most leverage for negotiating your deficiency balance. This is because if you allow the property to go into foreclosure, the property will sell for 60 cents on the dollar and the lender will lose all deficiency rights. Thus, it is in the lender’s interest to simply accept the short sale as payment in full. Alternatively, if you have a 2nd mortgage, you have less leverage, since the 2nd lienholder can usually pursue you for the deficiency no matter what.
Now, let’s talk about a couple techniques that I’ve used to personally negotiate 100% waiver of deficiencies or a settlement for less than what is owed:
1. Financial hardship. If you are in true financial hardship, you must make this absolutely clear to the lender. You must convince the lender that it is not worth pursuing you, since you have no assets, and that foreclosure means “little” to you if they are not willing to budge (this will surely scare the 1st, while it might not have so much effect on the 2nd)
2. Threaten bankruptcy. If you threaten bankruptcy, (esp. if you send a letter or a BK schedule), lenders will work with you. In the event of bankruptcy, lenders are at the mercy of the bankruptcy trustee and how they decide to approve the terms of the BK. If you are in financial hardship with much debt, you will probably be qualified to discharge that debt. Threaten bankruptcy. You can get Pre Paid Legal attorneys to write letters and make phones calls to your lender if you want to add serious firepower to your negotiations.
3. Have the buyer raise the purchase price. This is why it is absolutely important that you do not try and haggle buyers for the highest priced offer when you intial do the short sale. This will only harm you. Most homeowners are under the impression that the higher the offer, the lesser likelihood that lenders will release the deficiency. This is not true. On the contrary, lenders will be more likely to release the deficiency if the purchase price is raised AFTER the lenders are intially given a much lower offer.
My lender isn’t budging and is not waiving the “deficiency” language and/or is requiring me to sign a promissory note!
In the event that you are running into this issue, it is likely that your missing one of the above steps. However, I understand that sometimes the lenders will simply not budge.
My opinion (not legal recommendation), is that you release the lien anyways and follow through with the short sale to pay off the 1st (in most cases, a short sale will allow you to at least get the 1st off of your back). Any remaining debt with the 1st or 2nd, any promissory note or the “right” to pursue a deficiency is nothing more than unsecured debt (like a credit card) for the lender (which they hate), and if you default on that, then the lender is left with the choice of either suing you for the debt, to settle for less than owed or to simply write the debt off and issue a 1099-c. Releasing the debt as a tax write-off, by the way, is quite rewarding to the lender and in many cases, the lender will simply write off the debt.
Once you corner your lender into this situation, it is in your best interest to repeat the above steps (show evidence of hardship, threaten bankruptcy). Lenders, their creditors or their attorney firms will most likely be open to look at different options, especially if you threaten bankruptcy.
If you have some cash or can borrow some cash, you can also do “debt settlement” with your lender (as well as with all of your other unsecured debt) and try to settle for 20%-40% of your debt.
Can’t I just allow my property to go into foreclosure? Don’t they lose their deficiency rights if I do this?
No. If you live in a judicial foreclosure state, the lender can still pursue you for the deficiency. If you live in a non-judicial foreclosure state, the non-foreclosing lender (usually the 2nd) can still pursue you for the deficiency.
OK, so what if I get the deficiency waived or the lender decides to release the debt as a “tax write off”? Won’t I still owe taxes on the deficiency?
Yes, unless you are qualified for the Mortgage Forgivess Debt Relief Act of 2007.
Now with everything that I’ve mentioned, keep in mind that a professional short sale negotiator is an absolute necessity when dealing with a short sale. There a billion other things that can go wrong in a short sale, so make sure you hire representation.
One last concern I want to address: “My credit is important to me! How do I improve my credit after a short sale?”
I’m sure you know by now that a short sale will damage your credit, including the 30/60/90 day late payments that show up on your payment history, although a short sale is not as damaging as a foreclosure.
Well there’s no need to worry. We’ve recently partned with Lexington Law, an attorney firm that specializes in removing negative items from credit report, NOT based on accuracy (since most negative items are accurate), but on OTHER factors that are just as important.
I hope that by now, I’ve provided you with enough resources & information necessary to close your short sale, walk away from your property and minimize the damage as much as humanly possible. You may want to bookmark this blog post and keep it as reference for the future.
I truly wish you the best,