In Jupiter Florida will the deficiency be forgiven at the end of the short sale?

by Rodney Forbes on September 30, 2012

Short Sale Lead MachineOnce a homeowner receives a foreclosure notice, they’re usually already in dire states. The homeowner’s first reaction is usually to try to save the house. If the homeowner can’t muster the financial resources to accomplish this, the objective switches to minimizing losses. For homeowners facing an inevitable foreclosure, the primary goal is minimize damages and seeking a fresh start. Thus when a homeowner hears about the benefits of a short sale vs. foreclosure, their reaction isn’t one of pleasant surprise, but rather it usually comes in the form of an asked question: “If I do a short sale, will the deficiency be forgiven?”

This is an important question for a homeowner when he/she is contemplating a short sale. Despite the many benefits a short sale has on the homeowner’s credit, their ability to purchase a home again in the near future, and their psychological well-being, a short sale would ultimately be of little value to the homeowner seeking a fresh start if it didn’t discharge them of their debt burden to the mortgage lender. The short answer to the question is that yes, under the right conditions a short sale specialist can help you negotiate a short sale that will include forgiveness of the short sale deficiency.

But in order to answer this question in depth, first we need to understand the basic financial and legal underpinnings of a real estate short sale.

Short Sale Definition

So what does “short sale” really mean in terms of the legal obligations of the parties? A short sale in real estate is defined as a transaction where the proceeds of the sale of a property are less than the debt owed by the property owner to the lien holder. While the lien holder agrees to release their lean on the property for the short sale to occur, the borrower is not necessarily released from their debt obligations for the deficiency of the loan.

Short Sale Deficiency

A short sale deficiency is – as the term suggests – the deficiency between the proceeds of sale of and the total debt owed by the borrower. While the lender may have released the lean on the property, in most states the borrower still owes a personal debt for the unpaid balance. The bank may seek a short sale deficiency judgment in order to collect on this debt, unless the borrower can negotiate a “no-recourse” clause in the short sale agreement, forgiving the borrower for the deficiency. This is the most important part of the agreement for the homeowner, which is why we highly recommend that the homeowner seek the services of an experienced short sale specialist to negotiate their short sale agreement.

Short Sale Deficiency – California & Other Non- Recourse States

In some states, referred to as “non-recourse” states, borrowers are not held personally liable for the deficiency. Once the home is sold, the lender cannot seek a short sale deficiency judgment against the borrower for the balance of the debt owed. The specific anti-deficiency statutes will vary from state to state. In some non-recourse states, the lender can still collect some of the deficiency from the borrower, while in others the non-resource laws do not apply to refinanced mortgages. Below are some of the major recourse states at the time of this writing:

• Alaska
• Arizona
• California
• Connecticut
• Florida
• Idaho
• Minnesota
• North Carolina
• North Dakota
• Texas
• Utah
• Washington

Because the specifics of the non-recourse laws will vary from state to state, it is important to consult with a local short sale specialist about the non-recourse laws in your state. Your short sale specialist can refer your question to the appropriate lawyer, or he/she may be qualified to address your concerns directly.

Why Would A Lender Forgive The Short Sale Deficiency?

Some owners question why a mortgage lender would be willing to forgive a short sale deficiency. Wouldn’t the mortgage lender be losing money? This is a valid question, and the answer is yes, they will absolutely lose money on a short sale when they forgive the short sale deficiency balance. However, they will lose even more money if they are forced to foreclose on certain homeowners.

While foreclosures are an extremely unfortunate occurrence for the owner, foreclosures aren’t cost-free for the banks either. There are numerous legal and administrative costs borne by the bank if they have to proceed with the legal action and paperwork necessary for a foreclosure. Earlier while discussing the definition of a short sale, we mentioned that a lender could technically permit a short sale by releasing their lean on the property, but then later seeking a short sale deficiency judgment against the borrower. However, if the lender knows they will be unable to collect from the borrower, then the borrower or the borrower’s agent will have the leverage necessary to negotiate a debt forgiveness clause into the short sale. Even if the lender fore goes their right to pursue the borrower for the deficiency, a short sale would still be significantly cheaper for the lender in such a case than having to foreclose on the home. Even if a borrower has some assets remaining, collecting on a deficiency judgment can be expensive due to the legal costs, and in many cases involving homeowners facing foreclosure, asset recovery may be difficult or impossible.

This is where the experience and expertise of a short sale specialist will be beneficial. An experienced short sale negotiator can prepare the appropriate real estate short sale package, hardship letter for short sale, and negotiate a no-recourse clause into the final short sale agreement, giving you legal assurance that the lender will forgive the deficiency.

It’s important that you select a Realtor with a wealth of experience in short sales to negotiate your short sale agreement. As you are now aware, short sale deficiency forgiveness is not guaranteed in most states, but a Realtor with a wealth of experience and expertise in short sales may be able to negotiate deficiency forgiveness in many cases.

Rodney Forbes is a Realtor® and registered broker with Forbes Realty of South Florida, based in West Palm Beach Florida. Rodney and his team work in Palm Beach, Broward, Martin and St. Lucie Counties. As a recognized expert on short sales, Rodney has been featured on radio and national web conferences for agents. Rodney has also authored the book “Should I Short Sale My Home?”

Forbes Realty of South Florida also specializes in REO asset disposition. Rodney works with several banks and asset managers in the Palm Beach County area. Rodney is the main author for the popular real estate blog South Florida Real Estate Report. You can find a wealth of information regarding bank foreclosures, short sales, real estate news and local real estate trends.

For more information, please call Rodney at 561-337-4810 or email Rodney@ForbesRealtyOnline.com

 

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