Lenders sometimes seek deficiencies after a short sale
Q. I am selling my house on a short sale. My bank is telling me they will agree to the short sale but I will still be responsible for any money still owed the bank after the sale, unless we can make a deal. I always thought that once the short sale was over, any money the bank was short was forgiven. Was I wrong or is my bank just being difficult?
A. I’m sure I’ve explained what a short sale is in the past, but allow me to provide a quick description for anyone who does not understand what a short sale is. A short sale occurs when the lender (or lenders) agree, upon the sale of a property, to accept less than full payment for the amount that is owed to them. Short sales were uncommon during the years of rising home prices. However, with the drastic decline in home values, many homeowners, especially owners who have purchased in the last five years or so, cannot fully pay off their mortgage(s) upon the sale, hence the “short sale.”
In most circumstances, lenders will agree not to pursue the borrower for the difference between the mortgage balance and what the lender actually realizes from the sale. However, recently, I have been involved in two short sales where the lender has refused to simply “forgive” the deficiency. In both cases, the lender has asked the borrower to make an offer to settle the deficiency. In the event the lender and borrower reach an agreement, the lender agrees to accept the reduced payoff and not pursue the borrower for the balance upon payment of the agreed settlement. In the event an agreement is not reached, in both cases, the lender has agreed to release the mortgage lien and allow the sale, but retains their right to pursue the deficiency balance.
Remember, the Note you sign when you purchased the property is the actual obligation. The mortgage is simply security for the Note. By releasing the mortgage lien, the lender is converting the obligation from secured to unsecured. They may still proceed against the borrower on the Note, obtain a judgment and attempt to satisfy that judgment through the various means provided in our statutes, such as a wage garnishment or recording a lien against other property.
The amount you may offer to settle with the bank will be based upon numerous factors, such as the amount of the deficiency and your financial situation. If the lender is receiving a large percentage of what is owed and you are in dire financial straits, a minimal offer may get the job done. However, if the lender is taking a large loss and the borrower has a good job or significant other assets, the borrower has exposure to a judgment and must take that into consideration when negotiating with the lender.
Regardless of how you intend to proceed, I strongly urge you to seek the advice of a real estate attorney prior to moving forward.
Q. I am refinancing my mortgage and am being charged for a lender’s title policy. I looked at my original closing statement and I paid for a lender’s policy when I bought this place. Is this a necessary charge or am I being gouged?
A. You are not being gouged. The lender’s policy you paid for when you purchased the property insured the lender that funded your original mortgage. Presuming a different lender is funding the refinance, they will require a new lender’s policy. In the event you are refinancing with the same mortgage company, ask your loan officer if the lender will waive obtaining a new policy.
Ÿ Send your questions to attorney Tom Resnick, 345 N. Quentin Road, Palatine, IL 60067, by email to tdr100@hotmail.com or call (847) 359-8983.