Liability for a Short Sale Deficiency if Bank Filed Satisfaction of Mortgage
Will I be liable to the bank for a deficiency if the bank provides me a satisfaction of mortgage in a short sale?
In a short sale, a seller sells the property to a buyer for less than the amount owed to the bank. The bank, along with any other second mortgage company or lien holder (such as the IRS, judgment lien holder, etc) must approve the sale before it is complete. Specifically, all these lienholders must file a satisfaction before the sale is complete. Short sales have become the norm in Southwest Florida because the valuation of real estate has declined heavily. The short sale allows the property owner to sell the home and be free of future mortgage payments, property taxes, and liability. But what happens to the loan balance to the mortgage company, the second mortgage company, or the judgment holder? Is the seller responsible for these amounts owed? The balance of the amount owed on the note minus the amount received through the sale is called the "deficiency."
If the mortgage company files a satisfaction of mortgage, it is releasing any claims it has in the property, not the claims it has against the seller. In other words, a satisfaction only clears up title to the property. In general, the seller is still responsible for the deficiency unless the paperwork in the short sale states otherwise. Some short sale documents state "lender reserves the right to collect deficiency." If the closing paperwork has this language, the lender can file a lawsuit in court against the seller to collect the money even though it has filed a satisfaction with the court. The same is true for second mortgage holders or judgment creditors. Sometimes the paperwork has no language one way or another about the deficiency. If the paperwork is silent as to the deficiency, the terms of the original promissory note will control. In most cases, the promissory note allows the lender to pursue the deficiency even if the property was sold at a short sale.
The only way to prevent a lender in pursuing a deficiency is to have the lender sign a release at closing that releases its right to pursue a deficiency. In terms of negotiation, the time to obtain the release is during the negotiations to close the sale. The lender has more reason to sign a release during the short sale negotiation because it can avoid the legal fees and time in a foreclosure proceeding if the short sale closes.
If you are selling your property in a short sale, your should hire an attorney to negotiate elimination or reduction of the deficiency. Your realtor and title agent are compensated at the time of closing, and are financially motivated to close the sale as quickly as possible. Your interest is to walk away from the property owing as little as possible. Your attorney can negotiate with the lender to completely eliminate the deficiency or to reduce it. Often times, the lender will allow the seller to repay the negotiated amount without interest for several years. If you are looking for a short sale attorney in Fort Myers, call the Rothrock Law Firm at (239) 206-1948.