Did you know that sometimes, despite our best efforts, lenders in a short sale will want the borrower to pay some money back? For example, if you have a $300,000 house with $315,000 on the first mortgage and $75,000 on the second, that the second mortgage might only release in the lien in exchange for a promissory note, unsecured terms, or cash settlement? We've had this happen to clients before, and while it is unfortunate, sometimes we can't get the lender to change their mind. They might feel there isn't adequate hardship. They might play "hardball." It doesn't matter. Some lenders want more money.
If you have an approved short sale on the table with terms that require cash or a payment plan of money after the closing, and you have an auction date set for 3 weeks away, and the numbers resemble the above example, you have to choose your poison. You can close and have payments of $180 per month for another 15 years, or you can play hardball yourself and get foreclosed on, with your rear end out the window for $315,000, all back payments and interest, and legal fees.
Let's see: A choice between a $30,000 unsecured loan (which you might be able to renegotiate) or a foreclosure for an estimated $350,000. What makes more sense? Hmmm. Which would you choose...
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Okay, I reread this blog 5 times and don't understand it. Part of the problem is that Arizona is a non-recourse state. Currently, the banks cannot go after homeowners who foreclose on a primary residence on any of their purchase money mortgages. However, if they did a cash out refi or a HELOC (home equity line of credit) after their purchase, that's a different story.
So, is your example of a $30,000 loan a typical amount the sellers would have to pay AFTER a foreclosure in your state? Is there recourse for the full $350,000?
And, I thought there was still a federal law about non-recourse in effect until 2012?
All the sellers that I have worked with have refused the soft paper. Eventually all of the banks approved the short sale without it.
I just had this situation as well. The deficit was only about $13,000. It was a no-brainer for my seller to take the small payments on that amount than go through a foreclosure and complete deficiency judgment. It is all about choosing your poison as you said and it makes a lot more sense in my seller's case to continue to pay what was left that did not get paid out of the sale. She was relieved that it was an option for her. I am not sure if only certain states allow this so it will be interesting to see the other comments that you receive.
Juli- in New York the seller remains liable. There is no typical amount, but all the post closing debt I have ever seen (and it is atypical) has involved a 2nd lien.
Maya-if there is an auction date set that is a pretty high stakes game of chicken.
For the full amount? What about that federal waiver? I thought it was good until 2012?
Karen- New York is my market, so the rules may differ elsewhere.
I'd choose to live in a non-recourse state....or at least a no-recourse-on firsts state like my own.
Phil, California is non-recourse state for purchase money. So many argue here why even attempt a short sale when homeowners can walk away and maybe even get cash for keys? But, if I were in New York, and there was recourse, I'd take the note and reneg later. Good info, thanks,
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I just feel so much for people in this situation. It's tough no matter what you do and super stressful. I agree, you need to pick your poison and clearly and logically the lower amount is better, but gosh, that must stink big time.
I applaud you everyday for dealing with Short Sales so well. You are a rock star.