Short Sale FAQ – Part I – Mortgage deficiency and Short Sale
What is a mortgage deficiency and how does it relate to a Short Sale.

Q. How do you start the short sale process?

A. Before you start anything you need to take a step back and look at the bigger picture.

Q. No, we really do not want to keep the home, what else should we think about prior to starting a short sale?

A. Next you need to examine you compete financial picture. If your short sale goes perfectly what else will you need to deal with? Some people may have so much credit card debt that they will need to file a chapter 7 bankruptcy no matter what. Other folks find after a short sale their finances line up in perfect order. As a part of this economic examination look at the short sale itself; exactly how short is the short sale going to be and do you live in a deficiency state.

Q. Let me take that one part at a time, what makes a state a deficiency state and where can I find if I live in a deficiency state?

A. In some states a foreclosure sale ends your relationship with the bank and issues related to that mortgage. In other states, deficiency states, you still owe that bank the difference between what they got for your house at the foreclosure sale and what you owed on the mortgage. We call this difference owed the deficiency. Find your state in the table of deficiency states.

Q. Can you give me an example of a deficiency?

A. Imagine you start with a mortgage of $150,000 and at the foreclosure auction the home sells for $110,000, you still owe the bank a deficiency of $40,000.

Q. If my first mortgage forecloses what happens to my second mortgage?

A. The entire second mortgage due becomes a deficiency and in a case where the first foreclosed them out and it does not matter if you live in a deficiency state, you would owe the entire amount due

Q. Would these represent secured or unsecured debts?

A. Even though these began as secured debt, once the foreclosure sale occurs and the securing collateral sells the remaining deficiency debt become unsecured debt, just like credit card debt.

Q. Now that you mention it, I owe quite a bit of credit card debt, how does that play into this picture?

A. Start by looking at your non-deficiency debt by itself. How would you deal with it? Would you file for bankruptcy? How much money would you need to settle it? Then look at the situation again figuring an estimate of your mortgage deficiency.

Q. What do I do with all of that information?

Q. Is this the part I've been waiting for? Can we talk about who should do a short sale?

Q. So in your example of the two people above why would their situations end up with different outcomes when it comes to a short sale?

A. If you know with some certainty a chapter 7 bankruptcy lurks on the horizon this event will damage your credit as bad as or worse than a foreclosure. A chapter 7 bankruptcy takes care of discharging the deficiency debt. Therefore, for the person in the path of a chapter 7 bankruptcy opting for a short sale offers little advantage.

Q. I heard I can control when I must move out or the house a bit better in a short sale, would a chapter 7 candidate still want that?

A. By deciding when you file your chapter 7 bankruptcy you gain some control over when you move too.

Q. Let's take the person looking at a deficiency; would all of them want short sales?

A. Probably, but some more than others. Those facing larger mortgage deficiencies might find even more enthusiasm for a short sale as well as those with some other assets.

Q. How do you other assets come into the decision on opting for a short sale?

A. For many people a mortgage deficiency represents a debt on paper, but one they really possess no ability to deal with other than filing a bankruptcy to discharge it. For others with assets the mortgage deficiency becomes a debt where the bank might force them to liquidate other assets to pay.

Q. So the bank can force you to sell other possessions to pay the mortgage deficiency?

A. Yes, and garnish income too, for those with the ability to pay a mortgage deficiency the bank maintains some powerful weapons through the court system to take everything they can from you until they are paid in full.

Q. I read in the page about what is a short sale that a good short sale discharges the entire deficiency, is that correct?

A. In a perfect world from the debtor point of view, yes. In reality most times it still works out that way. Exceptions most often come from people who do not understand the short sale process or those who do not get a professional short sale negotiator to help them or folks with significant other assets.

Q. Since we were talking about people with assets let's stay there a moment. Can people with other assets even do a short sale?

A. Absolutely, if homeowners do not want to keep a property and the bank and the property holders both wish to avoid mortgage foreclosure than a short sale becomes a great option for both. The sticking point for people with assets becomes the negotiation of the deficiency.

Q. So in a short sale the deficiency does not come out as an all or nothing sum due.

A. Yes, despite the fact that most good short sales will end up with no deficiency at all, where the homeowner has other assets or income to pay even a portion of the deficiency the bank tries to get something, even in cases where they settle for less than all of the deficiency.

Q. I what cases do they demand the entire deficiency?

A. Almost none. Even when a bank might get most or all of the deficiency they still run the risk that something happens and they fail in their collection attempts or the legal costs to seize the money or assets become exorbitant or that the assets lose value. On top of all of this collection takes time, in some cases many years. For these reasons even in cases where assets might be available to pay a deficiency bank will settle for less than the full amount owed.

Q. Do deficiency settlements need to be paid in full all at once?

A. No, but you might negotiate a better deal that way. I have seen deficiency settlements set up as unsecured promissory notes paid over a term of years. When I arranged them I even set them up with zero interest.

Q. That does not sound like a bad deal, why would banks do that?

A. Go back to what we said earlier, in almost all cases well planed professionally negotiated short sales end up with zero payment on the deficiency. When the bank gets a case when they receive even a portion of a deficiency they tend to be liberal with the terms.

Q. Why would a homeowner ever offer the bank anything for a deficiency payment?

A. Initially you never should, but you need to remain realistic too. If the bank expresses interest in doing a short sale but they reject the concept of a zero deficiency you must look to the details of your own situation.

Q. What happens when I really can't pay any deficiency after the short sale and the bank just gets nasty?

A. You maintain the option not to complete the short sale and file a bankruptcy. The bank ends up with zero in a chapter 7 and the whole sale process gets delayed and expensive for them. For people representing true chapter 7 candidates banks standing firm on a deficiency payment become the rare exception not the rule.

Q. How would the negotiation work for someone with assets?

A. The professional negotiator or the lawyer for the homeowner would try to cut a deal where the debtor pays as little as possible while the bank tries to get as much as possible.

Q. Should a person try to save some fees an negotiate the short sale deficiency be themselves?

A. No, unless they are the kind or person who might try to perform their own brain surgery to save a few dollars.

Q. How does the bank decide if they want to take a hard line and demand a deficiency payment or if they will let me go?

A. To start with they have whatever you gave them while your loan fell into default. This means any documents or statement you gave them while you tried to obtain a modification even if it failed or any other foreclosure avoidance paths you worked with them on. I advise people to treat any dealings with a bank in the same way you would if arrested, anything you give the bank can and will be used against you. Making sure you provide the right paperwork proves to often be one of the most valuable services your short sale or foreclosure mitigation professional may provide.

Q. Imagine I know better than that or I never gave them a single thing since I took the mortgage, how could they know what I might have for assets or income?

A. To start when you took the mortgage you likely provided a full financial statement. The closer your current financial problem stands in time to the origination of the mortgage the more it tends to be accurate. At the time of the mortgage application you probably gave the bank permission not only to run your credit for the mortgage application but also to run it again as needed over the life of the mortgage. They can use that and other public records to figure out quite a bit.

Q. How would my credit report give them any clues?

A. When they see you took a loan from the Acme Yacht Company for $500,000 they figure you own an expensive boat. The fact that you paid the current balance down to $50,000 means you probably earned some nice equity in that ship and when they see your payments each month came in at double the required under the loan they calculate you have cash flow sufficient to make a mortgage deficiency payment.

Q. Do they want every penny I own to pay the short sale deficiency?

A. No, but they may technically be entitled to that and will want their share.

Q. Will I get to stay in the house longer if I try a short sale?

A. That depends on the house and the bank and the likelihood that the short sale might succeed. If the bank feels the whole short sale process offers little chance of success you won't gain much time at all. On the other hand if they feel you have a great chance of success or they really do not want your home in their portfolio you may gain a great deal of time.

Q. What do you mean the bank may not want the house in their portfolio?

A. Take a property in a bad neighborhood or in need of many repairs. The bank might rather let you stay their and keep the place up yourself while they try to sell it opposed to taking responsibility themselves to maintain it during the sale process.

Q. When do I need to move out in a short sale?

A. On or around the closing date, just like with any other sale of a home.

Q. What do I get to take out of the house when I move?

A. Take all your personal belongings, but leave anything attached, like light fixtures. You leave appliances too.

Q. Do I need to stay in the house during the short sale process if I don't want to be there any longer?

A. No, especially if your job required you to move or personal circumstances made you want to move.

Q. What kinds of personal things would make a person want to move even when you basically get to live free while you await the short sale?

A. For some people the house represents a constant painful reminder of the past. Perhaps it's where they lived prior to a divorce, or where they lived before the death of a family member.

Proceed to Short Sale FAQ – Part II
The short sale process