Well that's a great question. Making a cash contribution and/or signing a promissory note is called "Participating in the loss". Whether or not you are asked to participate in the loss is based on several factors. Your.....
- Cash reserves
- Credit score
- How delinquent you are
- Income level
As of November 1, 2012 the Federal Housing Finance Authority intiated new Streamlined Short Sale Guidelines that apply to all Fannie Mae and Freddie Mac mortgages.
In a nutshell:
Cash Contributions - Borrowers that are less than 31 days delinquent MUST make a cash contribution to the loss. And borrowers more than 90 days delinquent and a credit score of less than 620 at the time of the evaluation are not required to make a contribution. Specific guidance on “borrower contributions” where required, including how to calculate the contribution amount and making contributions MANDATORY where the borrower is 31 days or less delinquent. The guideline here is cash reserves of greater than $10,000 or 6 times the total monthly mortgage payment will trigger a contribution by the borrower.
Other Investors and Lenders may have their own guidelines. Hopefully most will follow suit and implement the FHFA Guidelines.If you asked to make a contribution it can be negotiated. However my experience is that if they ask for a cash contribution and/or promissory note you will have to give them something.
One thing to remember is that you signed a promissory note when you took out the loan. This document is your promise to pay. If the lender is willing to forgive the Deficiency and relieve you of any future liabilty then signing a new promissory note of say $20,000 (with zero interest) to replace an existing note of a much higher value is a good deal.
Don't let a lender's request for you to "participate in their loss" throw you for a loop. Just negotiate the best deal you can get and then move forward. Aslo, remember that if you truly do not have the financial ability to pay..... they probably will not ask you to make a contribution.
I hope this helps.