A Deficency judgment is an overall complicated processes to understand , so when you are asked if a bank can file one after a foreclosure or short sale what is the correct answer? Most of the time deficiency judgments come as a surprise after a short-sale or foreclosure because the seller didn’t obtain the necessary legal or tax advice beforehand.
Contrary to popular belief deficiency judgments arise from the defaulting on a promissory note, not the mortage. A promissory note is nothing more than a promise to pay back to the lender, and in some state the law can hold you personally liable for these and come after your assets if you miss your payments. For a promissory note to work it is usually secured by a mortage or a trusted deed which is usually recoreded in public records so the public knows when a property has a lien against it.
When a promissory note isn’t paid the beneficiary has the choice to foreclose the property since this is the security for the promissory note. If the payments aren’t made by the borrower during the foreclosure period, the home can go to auction. Generally properties in auctions are sold for less than the amount owed, where is when the deficiency arises from. If it was sold for more than the amoun owed there is no deficiency. When no one bids enough to pay the bank, the bank keeps the property.
To stop losing money sometimes bank will do a short sale accepting less than the amount owed. This is done when the foreclosure is pending. If a real state agent is hired by the seller, an offer is made by a buyer, and the bank accepts it, the home is sold at a loss to the bank.
A deficiency is the difference between the amount received by the buyer and the fair market value of the property, as long as the amount received is less than the amount owed. Whether a deficiency judgment can be pursuid by a bank depends if the promissory note makes the seller personally liable for the debt, which greatly depends in the state you live.
In California all purchased-money loans on a one-to-four-unit residential dwelling are not tied up to deficiency judgments. Hard money-loans, or loans made after the home was purchased through refinicing or second mortage, can be subject to deficiency loans under a number of different conditions.
Sometime hard-money lenders sell the promissory note to collector for much less than what its worth, which then the collector will try to get from the borrower. When a lenders accepts a leesser amount through a short-sale or foreclosure the security for the hard-money is realeased but the promissory note may not be, and you will probably get a call later asking for repayment. Next, a couple of points to remember if this ever happens to you.
- Most of the times lenders will negotiated for a discount payoff, or settled for less than the full amount.
- If you are asked fo a new promissory note to replace the old one make sure you get a “paid in full” promissory note.
- If note is sold to a collector or investor the discount is usually greater.
- After the note is fully paid, ask the lender for a promissory note marked ” paid in full.”
As a buyer or seller, always consult witha real estate agent, lawyer or accountatnt before getting into a shot-sale or foreclosure. In actuallity you have better chances of paying of your debt with a short-sale than with a foreclosure.