Your lender has the right to pursue you, the borrower of the mortgage, for the unpaid balance of the mortgage. This is also known as the deficiency balance.
$325,000 — Your mortgage balance.
$125,000 — Sales price of your home.
$200,000 — This could be your deficiency balance.
A short sale offers the borrower of a mortgage the opportunity to negotiate with the bank to forgive the deficiency balance. This is not automatically the case and why it is imperative to find the right short sale specialist in Las Vegas who works as your advocate to release you from this obligation.
Many times, the bank will forgive a deficiency balance in exchange for a small cash contribution before close of escrow. If you cannot pay this you must inform your short sale agent.
With a foreclosure, there is no opportunity to make an appeal for the forgiveness of the deficiency balance.
There seems to be a lot of confusion about the difference in consequences between a short sale and a foreclosure. The words “deficiency judgment” seem to strike terror in the hearts of most homeowners who are in default on their loans. The question most often asked is, “What is the difference if I let my home go into foreclosure or if I sell it in a short sale?”
The only place that the words “deficiency judgment” appear in the law is in connection with a foreclosure. If a borrower is in default on his/her loan, the beneficiary of the deed of trust may choose to foreclose. If the beneficiary on a deed of trust chooses to foreclose on a residence, he can ask the trustee to sell the property at a trustee’s sale. If, at the trustee’s sale, the trustee is not able to sell the house for the amount of the outstanding debt/loan on the house, then the beneficiary has the option of seeking a deficiency judgment against the borrower. Notice, I said “seeking” a deficiency judgment.
A deficiency judgment is not automatic. The beneficiary must file a complaint in a Nevada district court within 6 months of the trustee’s sale asking the court for a deficiency judgment for the balance remaining due. In this lawsuit, the trustee must serve a summons on the borrower (now defendant) just like any other lawsuit. The defendant must file an answer disputing the fair market value of the property sold. (NRS 40.455).
Before awarding a deficiency judgment, the court shall hold a hearing and shall take evidence presented by either party concerning the fair market value of the property sold as of the date of the foreclosure sale or trustee’s sale. If the court finds the debt is more than the fair market value of the property, it may enter a judgment of deficiency against the borrower/defendant. This is called a “deficiency judgment”.
A new law regarding deficiency judgments will took effect for deeds of trust on owner-occupied houses financed after October 1, 2009. This law will help eliminate deficiency judgments under specific circumstances.
A short sale is an alternative to a foreclosure. When the borrower can no longer make the mortgage payments as agreed, he/she may choose the option of working with the lender to agree to accept a payoff of less than the balance owing on the loan. If the lender agrees to allow the borrower to sell the house for less than the original debt, it might not agree to release the borrower from the loan debt. Sometimes, lenders only release the lien so that the buyer at the short sale can take the house without any clouds on the title. However, releasing the lien does NOT relieve the borrower from owing the remainder of the loan. The lender can now sue the borrower on the promissory note (which the borrower signed at the time he/she signed the deed of trust). Since the promissory note is a contract, the statute of limitations for the lender to sue on a contract is 6 years. The lender now has 6 years to file a law suit against the borrower on the promissory note.
Some lenders refuse to forgive the balance due on the promissory note and require the borrower to sign a new promissory note before they will approve a short sale. The lender who still holds the promissory note can sell these promissory notes to collection companies. Collection companies have 6 years to sue on the contract/ promissory note. These collection companies can sue the borrower on the promissory note 2, 3, 4, 5 years down the road when the borrower has likely recovered and is in a position to pay.