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.