Short Sales and the Question of Deficiency Judgment

Just last week I wrote a blog post about what I believed to be the most frequently asked question with regard to short sales. I reported that the most frequent question that I'm asked is about the time it takes for me to obtain short sale approval. If you want to read my answer to the question about short sale approval, please click here.

Now, several short sale aficionados and Realtor® friends from throughout the nation commented on my post, and shared other common questions.

Broker Bryant Tutas of Florida told me that he is most frequently asked the following question:

Will the lender come after me for a deficiency?

The deficiency judgment is an important consideration in the short sale process.

First off, as part of the short sale, the bank agrees to accept less than the amount owed on the mortgage in order to settle the debt. But, what happens to the difference? Will the seller or borrower remain liable for the difference?

As a Broker and a Realtor®, I would advise anyone facing the situations I describe to consult with an attorney or an accountant. With that being said, borrowers should carefully review the short sale approval letter. The short sale approval letter is issued by the lender or the lenders and will specify the bank’s plans with regard to the deficiency balance.

Additionally, each state has different laws with regard to short sales and deficiency judgments. In California, for example, Senate Bill 931 (effective 1/1/2011) will offer some anti-deficiency protection rights to first lien holders. Anyone who is considering selling their home, as a short sale should seek clarification on the anti-deficiency measures in their state and also carefully read the short sale approval letter.

Sellers should keep a copy of that short sale approval letter on file and handy. Recently, I spoke with a short sale seller who was receiving aggressive phone calls from the bank about collection activity, after the short sale had closed. This seller had an approval letter that stated that the bank was not going to take any further action after the short sale. The seller was able to send a copy of the approval letter to the collection agents and the calls ceased immediately.

Anyone who is considering a short sale should understand the legalities surrounding the short sale approval letter and consult an attorney if necessary. Last, but not least, do not forget to keep a copy of the short sale approval letters!