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Deficiency waiver vs judgment: Is my lender going to pursue me for the deficiency in a short sale? Can I get my deficiency released if I short sale my property? When is the right time to ask for a deficiency release?

Let’s again address one of the biggest issues in a short sale, the deficiency. The deficiency is the negative balance that is left after a short sale has been completed.  I have to give all disclosures and of course advise you to seek legal advice for your situation, consult with a CPA or Tax Attorney, or contact our prepaid legal services partners.  Now, let’s dive in.

The main questions to consider are whether you will be pursued by your lender for the deficiency balance now or if ever?, and if you can get the deficiency waived prior to closing the sale, or after the short sale?  This article will answer many of your questions and give you some strategies to implement whether you are a homeowner, Real Estate Agent or Broker, or much needed and valued Short sale negotiator. 

Our continued goal here at www.seattleshortsaleblog is to continue to bring you the latest cutting edge news we receive from our experts in the field on what is happening on the front lines with banks.  Below are four important factors to consider when it comes to the deficiency.  Who is the bank and the investor? What is written on the approval letter? Who is negotiating for you? And lastly, are you willing to sign a promissory note or declare bankruptcy?
 
1. Who is your bank or the investor? Certain banks or more apt to agree to a deficiency waiver than others.  Why? Removing 7 words on an approval letter for a bank is them literally agreeing to walking away from thousands of dollars, if not hundreds of thousands of dollars.  I’m not saying that banks have a legitimate claim on the deficiency, I’m just bringing up legitimate reasons to consider on all sides.  Wells Fargo is more inclined to include deficiency waiver verbiage than say Chase Bank.  PNC just came out with a form they send to you saying they reserve the right to pursue a deficiency balance.  They won’t even look at the short sale unless you sign the forms to even begin the process.  Also, who is the investor?  Banks often times are actually the servicer of the mortgage, but there is an investor who makes all the decisions.  They ultimately loaned or invested the money to the bank to lend to you, and they are the ones who make the decisions. 
 
2. What is written on the approval letter? Just to make sure you understand.  The approval letter is the letter that comes from the lender with the terms they approve in order to close the short sale transaction, and that document supersedes any other language anywhere, it typically states that on the approval letter.  If you have two lien holders, a 1st and a 2nd Mortgage/Heloc, then you will receive two separate approval letters.  If it says “we release you from all liability and consider this loan paid in full” you are then released from the deficiency which is great.  If the approval letter states “we reserve the right to pursue” then the bank is keeping their right to pursue you for the deficiency.  The lender will have 6 years to pursue in the state of WA, or they might sell the debt to a 3rd party collection agency, or just write the loss off completely.  If there is no verbiage addressing the deficiency, either stating “we reserve the right to pursue” or “we release the lien and consider it paid in full”.  Then, you could still be liable for the deficiency.  Silence is not golden in this instance.  Our negotiators have found it best to see what verbiage comes on the approval letter first, before addressing the issue. Why? That way you have the approval letter in hand, step 1 is done, then you can escalate to a decision maker or contact you have already made at your bank to try and get the deficiency verbiage removed.  Now, getting the deficiency language removed is not an easy task to do.  You may or may not be able to do it, again depending on your bank, and if you have an established relationship with a decision maker at the bank.  Lastly with regards to the approval letter, if on the approval letter it states you will be receiving a 1099, the bank is writing off the loss that they are going to incur by approving and closing the short sale.  Chances are they will not be able to write the loss off and collect it back from you. 
 
3. Who is doing the negotiating on your behalf? You must have a trained professional asking for a deficiency release at the right time in the right way and negotiating your short sale.  Do you want a $10 an hour rep talking to a trained bank negotiator regarding your short sale? Or a Real Estate Broker who isn’t short sale trained and is handling all his transactions, listings, and buyers, and trying to negotiate your transaction.  The national average for real estate agents closing ratio on closing a short sale is 20-30% of the time, a short sale file will close.  Our short sale negotiators close almost 90% of their transactions, with no upfront fees.  Enough said on that topic, now your short sale negotiators in trying to get the verbiage removed, must escalate the file as discussed earlier.  Also you can threaten bankruptcy, which is a viable option for you, or you can offer a cash contribution or sign a promissory note to get the verbiage removed.  You still might have to give a cash contribution to get the approval letter in the first place, but you can raise the amount in an attempt to remove the deficiency verbiage. 

4. What if the bank won’t waive the deficiency? You, your broker, your negotiator, your attorney, have all done everything you can to get the deficiency verbiage removed and the deficiency waived, and no waiver.  This is a very real situation and happens all the time.  You must then consider all your options.  Do I let this property go to foreclosure? Do I file for bankruptcy? Do I go on with the short sale? In a foreclosure, consider your credit being affected more than in a short sale, it is believed that a foreclosure will stay on your credit for between 5- 7 years versus as little as 2 years with a short sale.  In many security clearance jobs if you lose a home you are automatically fired from your position, not so with a short sale.  You can purchase in as little as 2 years with a short sale, or if with a FHA loan and if you didn’t miss a payment, right after a short sale in some instances.  Now if you want to keep your home and not do a short sale bankruptcy might be a very viable option for you, and consult an attorney to get wise council.  You also can close on the sale and have that chapter of your life over, then negotiate the deficiency release after the fact.  Of course, you will have to pay some additional dollars but this could be the route you choose, again hire a professional.  Lastly, say you get pursued by your lender worst case scenario.  If you short sold your property and your finances weren’t that bad, it is more likely you will be pursued.  You will then have to settle with your lender or declare bankruptcy at that point.
 
Deficiency is one of the many issues in considering if a short sale is right for you.  Please contact us and we will have one of our experts contact you to answer any of your questions.

Written by SSB

20 Comments

  • Correct some mortgage companies do not waive the deficiency, I personally know of some mortgage companies that will waive any deficiency once a short sale has been completed. There are other things to be concerned about too even if your bank let you off the hook with a short sale(ss), regarding taxes. Good point though, a ss will affect your credit negatively for about 2 years which is much shorter that foreclosure or filing for bankruptcy. I also blog about helping homeowners with pretty much everything from preserving their credit to getting a great mortgage loan modification.

    Reply
  • Marlene Smith on

    We completed a short sale. Neither we nor our realtor saw the deficiency clause, and now Chase has come back to us for that amount, $31k but also whatever other fees add up to nearly $80k.
    Is our realtor liable for missing this? We’re in CA, so WA laws may not apply. Is it too late to ask Chase for a waiver? I don’t remember seeing a letter of agreement, so I have to investigate that one.
    Thanks for any replies.
    m.

    Reply
    • Hi Marlene,
      I’m sorry to hear of your complicated situation with Chase and your realtor. First off, I need to disclaim that I cannot give you legal advice regarding the liability of your realtor. However, my opinion on the subject is as follows.
      When you signed the approval letter, you have stated that you read the letter completely. Hence, you are liable for any verbiage stated on the letter.
      Regarding the request for a deficiency waiver from Chase post-shortsale, it is NOT too late. I suggest you speak with your negotiator to negotiate the current deficiency. Should the lender, a collections agency, or a PMI co, exercise the right to pursue the deficiency via their own efforts, a certified Debt Settlement Expert can help negotiate the debt even further as it is an “unsecured debt” like credit cards. Negotiating unsecured debt is very different from negotiating short sales, therefore you will want to work with a specialist who deals with this particular type of debt.

      Hope this helps!

      SSB

      Reply
      • He’s just telling you this to get your bnsiuess. A short sale is going to slam your credit file nearly as bad as a foreclosure will hit it. Furthermore, you may well receive a Form 1099 from the lender at the end of the year for the deficiency amount, and will have to claim that on your income as ordinary taxable income. Use caution before you proceed.References : Was this answer helpful?

        Reply
      • This is an aritcle that makes you think “never thought of that!”

        Reply
  • We just got a short sale acceptance letter from Wells Fargo that says that they are waiving the deficiency. When our lawyer called them to discuss some other items on the letter, the processor on the line implied that even though Wells Fargo (the servicer) was waiving the deficiency the investor (Fannie Mae) was not. What gives? Our lawyer had never heard of a situation like this. Is Wells Fargo gaming the system by making it appear that the deficiency has been waived when in fact it has not?

    Reply
    • With a short sale, you are selling your home for less than the blanace due on the mortgage. This way you are still paying back some of what you owe to the mortgage company and avoiding foreclosure and subsequently bankruptcy. You need to make sure the lender will agree to the short sale and will not hold you responsible for the deficiency blanace. Get any agreements you make with them in writing. Good luck!References : +2Was this answer helpful?

      Reply
    • That’s a subtle way of thnkiing about it.

      Reply
  • My issue is not with the Bank nor the Investor FNMA it is with Radian. Wells is made whole from Radian the MI company. It is Radian that is requiring the promissory note not Wells. Now what? My promissory note is above 80k and they will not budge. I cannot file bankrupcy. I cannot find any info regarding MI companies, it is one thing to negotiate with a bank but these guys are not moving…Any thoughts?

    Reply
  • First off I live in NY. I have a mortgage and a HELOC, both w Chase. The HELOC said in the language from their letter: “we agree to release our security interest in the property when we receive $5000 in certified funds…The amount paid to Chase is for the release of our security interest and we will waive the remaining deficiency balance on the account…”

    The first lien holder basically told me the same thing. I need to participate in some of the loss and they would provide me with a release like the one above. She said the language would not change and that they wouldn’t add anything regarding personal liability.

    Is it true that in order to be truly worry-free about the bank pursuing you for a deficiency balance you need a clause that specifically says something like, ‘Upon closing and disbursement of funds as outlined here, Bank X will consider this matter closed and will not pursue **YOU** for any additional form of deficiency balance.’ ”

    If I accept a deal such as the one outlined above by Chase, am I leaving myself open to future debt collectors? Or is removing the deficiency balance the same as saying that I do not owe them any more money?

    What about having Chase returning the notes to us marked “Paid In Full” in addition to the releases I described above that they have already agreed to? Is this sufficient to protect us?

    Reply
  • I have a Bank of America loan, the shortsale dollar amount differance is $15,000.00. It is a 2nd home. Can they come after me for this amount and try to attach it to my primary home?

    Reply
    • Hello Nora,
      Depending on your situation, you may be able to waive the $15,000 deficiency or walk away with a promissory note. This depends on your lender and negotiator along with other factors. Do you have a second mortgage on the home?

      Reply
  • I did a short sale for a condo unit with chase. It was at the end of 2010 now at the end of 2011 I was hit with a collection notice of $108K. I am trying to negotiate with third party collector and taking time to read the actual approval letter. Imagine after a year we have to request the closing file from storage. What will be the best way to negotiate with the bank? Should I hire a lawyer or best an accountant. I do not know how to go forward with the negotiation..I know they can discount the amount up to a 40%. How I can delay the process and how long do I have before they actually file a deficiency judgment against me. I live in the state of Florida. I was reading and I saw that we can also ask for a waiver even after short sale…but being Chase I think they may not go for it. What sources can I use to negotiate? What options are best? What timing frame do I have before they actually file a deficiency judgment? My worries is that this is an investment property…and I still own a second investment property and Chase is the bank who is holding that second mortgage. I have the second property out for sale…I am wondering if I sale it before deficiency judgment gets filed I should be ok or Chase has the right to keep the proceeds from the sale of the second property? I am also worry about this second property…if a sale do they collect money? or they cannot do nothing until deficiency judgment gets filed…meanwhile I can prolong negotiation process and see if property actually sells. Pls. advise.. Thank you.

    Reply
  • Hello Ana,

    I’m sorry to hear of your situation. I suggest you enter your information in the short sale tab and I will have our certified debt settlement expert contact you within 24-48 hrs to answer the questions you have.

    Peter

    Reply
  • Just received two approval letters for a hafa/cooperative short sale. First lien is with bank of America; they state very clearly that upon settlement the account will be considered cl closed with no deficiency. Chase ( actually via a verified debt collector) stated that “there will be no deficiency balance upon closing according to the terms outlined above”.
    Is this legally equivalent to chase waiving right to pursue ? It seems so since the letter states there will be no balance…thanks

    Reply
    • Hi Sam,

      If on both of your approval letters from BofA and Chase contains verbiage something along the lines of “we release you from all liability and consider this loan paid in full,” that is an indication that you will not be pursued for the remaining balance. If there is verbiage along the lines of, “We reserve the right to pursue,” then I highly recommend negotiating with them until you are able to form an agreement prior to closing your short sale.

      If there is NO verbiage regarding deficiency, you are NOT off the hook. I suggest you make sure the deficiency terms are clearly stated before you accept the approval letter.

      I also suggest speaking with your attorney for all of this as I am not one and can only speak from personal experiences. If you have more questions, feel free to contact me via: Peter@seattleshortsaleblog.com
      Thanks

      Reply
  • My property was foreclosured and sold by Wells Fargo. they said in letter to me that the Deficiency is waived. Does this mean that I owe nothing else on this property period? or do I owe anything?

    Reply
  • I have a waiver of deficiency from my lender. But I recently checked my credit report and it is showing as a charge off of 17,000.00 – how do I proceed? shouldn’t it show as fully paid for less than owed or a short sale? I heart that a charge off is on your credit report for 7 years rather than 3 for a S. S.

    Beth

    Reply
  • Thx for your post. I would like to comment that the exepsne of car insurance differs a lot from one insurance policy to another, given that there are so many different issues which contribute to the overall cost. By way of example, the model and make of the car or truck will have an enormous bearing on the purchase price. A reliable ancient family motor vehicle will have a more affordable premium when compared to a flashy sports car.

    Reply
  • I’m impressed by your writing. Are you a professional or just very knowledgeable?

    Reply

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