Will I Still Owe the Bank Money If I Do A Short Sale?

Will I Still Owe the Bank Money If I Do A Short Sale?

If you have one mortgage loan on your California home the answer is no. California Senate Bill 931 allows that after January 1, 2011, if a lender on a first mortgage accepts a short sale, they are agreeing to waive the deficiency amount. (There are exceptions of course) So, if they approve the short sale and it closes, you will not owe your lender any additional money, even though you have not paid back the entire loan balance. In fact, in my opinion, that is the entire goal of a short sale. You definitely should discuss the impact of Senate Bill 931 with your attorney when considering a short sale.

If you have two mortgage loans, the issue of whether you will continue to owe the second mortgage lender money is negotiable. [* July 2011 Update – California Senate Bill 458 indicates that if a second lien holder accepts the short sale, they are thereby agreeing to waive the deficiency (there are exceptions of course)]. The goal of the short sale negotiation is to obtain a full release of the second lender’s right to pursue a deficiency after the short sale. Accordingly, short sale sellers should review any and all short sale approval letters with their attorney to insure that the deficiency release language is sufficient to protect them. Also, it is not unusual to receive two demands from a second mortgage holder. The lower demand will often be what they will require to participate in the short sale — a simple “lien release” — the second higher demand will often be what they will require for a full release of their right to pursue a deficiency.

A short sale with two mortgage lenders may present itself like the following: Lien release demand amount $3000, and deficiency release demand amount $5000. Typically, the first mortgage holder will allow some amount of the short sale proceeds to the second mortgage holder. So, let’s say the the first mortgage holder will allow $4000 to go to the second lender, but no more. It would take an additional $1000 seller contribution to insure that the seller would not be pursued by the second lender after the short sale. The first lender would have to approve that additional payment and it would have to be reflected on the closing documents. In this example, after the $5000 deficiency release amount is met, the short sale seller would not owe any additional money after the short sale. [July 2011 Update – California Senate Bill 458 prohibits a short sale lender from requiring seller contribution although “voluntary” contribution is still allowable, many of the major lenders now will not allow it in CA (there are exceptions of course)].

If you are considering a short sale of your Orcutt, Vandenberg Village, Nipomo, or Arroyo Grande home, you should seek out an experienced short sale agent to guide you through this process. If you would like a short sale consultation, please call my office to schedule a meeting or a telephone consultation at (805) 938-9950.

Tni LeBlanc is an independent Real Estate Broker, Attorney, Short Sale Agentand Certified Distressed Property Expert (CDPE) serving the Santa Maria, Orcutt and Five Cities area of the Central Coast of California.

*Nothing in this article is intended to solicit listings currently under contract with another broker. This article offers no legal or tax advice. Those considering a short sale are advised to consult with their own attorney for legal advice, and their tax professional for tax advice prior to entering into a short sale listing agreement. Mint Properties is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.