There are several possible outcomes of a short sale. The first (best case scenario) is full debt forgiveness. This is most common for primary loans regardless of the existence of a second loan against the property. Debt forgiveness is also typical when there are two loans against the property and both loans are with the same lender, as long as the second loan is a purchase money loan (the loan was used to purchase the property). In some cases, there are two loans against the property with two different lenders. In these situations, the second lender will usually require a percentage of the loan balance in order to forgive the remaining debt. The minimum required payoff amount is determined by a number of factors, including the borrower's financial means, and can be as low as 5% of the loan balance. In most cases where there are two lenders involved, the first lender will only allow a small amount of the proceeds of the sale to go toward the second loan (typically $2,000 - $3,000). If the minimum payoff amount required by the second lender is greater than amount that the first lender will allow from the proceeds of the sale, the borrower is often asked to pay the difference out of pocket. This is usually referred to as a settlement and typically means that the borrower will not be responsible for any remaining debt above and beyond the agreed upon settlement payment. Settlement offers tend to be smaller (5-10% of the loan balance) for purchase money loans and larger (15-80% of the loan balance) for non-purchase money loans such as a home equity line of credit (HELOC) or a refinance in which the borrower took equity out of the property and used it for home improvements, to pay off other debt, or other purposes ("cash-out refi"). However, the financial means of the borrower is also an important factor and lenders often require larger settlements for borrowers with significant financial assets. Another possible (but much less common) outcome of a short sale is an unsecured promissory note. Unsecured promissory notes are sometimes offered by the second lien-holder when the borrower does not have the funds available to pay the negotiated settlement. If the lender negotiates an unsecured promissory note, the lien on the property will be released so that the property may be sold, but the borrower will have to agree to pay back some or all of the remaining debt. An unsecured promissory note is similar to other types of unsecured debt such as credit card debt. Unsecured promissory notes are usually interest free, but the dollar amount of the note is often double the amount of the settlement offer. EXAMPLES: Debt Forgiveness: Debra and Mike purchased a home in 2005 for $300,000 with a $60,000 cash down payment and a $240,000 conventional loan. In 2009, the fair market value of the home was $175,000 leaving Debra and Mike with negative equity of $65,000 and the loss of their $60,000 down payment. They decided to do a short sale and signed a purchase agreement for $175,000. The short sale was approved and Mike and Debra were granted full forgiveness of the $65,000 deficiency balance. Susan and Patrick purchased a similar home in 2005 for $300,000, but didn't have a cash down payment. They used "80/20 financing" and took out a primary loan for $240,000 and a second loan for $60,000, both through the same lender. In 2009, the fair market value of the home was $175,000 leaving Susan and Patrick with negative equity totaling $125,000. They decided to do a short sale and signed a purchase agreement for $175,000. The short sale was approved with 95% of the payoff amount going toward the primary loan and 5% of the payoff amount going toward the second loan. Susan and Patrick were also granted full forgiveness of the $125,000 total deficiency. Nicole purchased a home in 2001 for $300,000 with a $60,000 cash down payment and a $240,000 conventional loan. Four years later, in 2005, the home appraised for $450,000. Nicole refinanced the existing loan into another conventional loan for $360,000. She took "cash" equity out of the home in the amount of $120,000 and used it to purchase a car and fund her business. In 2009, the fair market value of the home was $200,000 leaving Nicole with negative equity of $160,000 and the loss of her original $60,000 down payment. She decided to do a short sale and signed a purchase agreement for $200,000. The short sale was approved by the lender and Nicole was granted full forgiveness of the $160,000 deficiency balance. Settlement: Jason purchased a home in 2001 for $300,000 with a $60,000 cash down payment and a $240,000 conventional loan. Four years later, in 2005, the home appraised for $450,000. Jason took out a Home Equity Line of Credit for $150,000 and still had $60,000 equity in the home from his original down payment. He used the $150,000 HELOC to pay off student loans, make some home improvements and buy an RV. In 2009, the fair market value of the home was $200,000 leaving Jason with negative equity totaling $190,000 and the loss of his $60,000 down payment. He decided to do a short sale and signed a purchase agreement for $200,000. The short sale was approved by the primary lender with full forgiveness of the $40,000 deficiency balance and $5,000 of the proceeds allocated to the second loan. The second lender approved the short sale with a minimum payoff amount of 20% of the balance ($30,000). Jason agreed to the settlement of $30,000 with $5,000 coming from the proceeds of the sale. He paid the remaining $25,000 out of pocket and the $120,000 deficiency balance was forgiven. Jim and Betty purchased a home in 2001 for $300,000 with a $60,000 cash down payment and a $240,000 conventional loan. Four years later, in 2005, the home appraised for $450,000. Jim and Betty refinanced the existing loan into another conventional loan for $340,000. They took "cash" equity out of the home in the amount of $100,000. They used the $100,000 to pay off loans on two vehicles and fund their daughter's college education. In 2009, the fair market value of the home was $200,000 leaving Jim and Betty with negative equity of $140,000 and the loss of their original $60,000 down payment. They decided to do a short sale and signed a purchase agreement for $200,000. The short sale was approved by the lender with a minimim payoff amount of $200,00 plus 10% of the deficiency balance ($14,000). Jim and Betty agreed to the settlement and paid the $14,000 out of pocket. The remaining $136,000 deficiency balance was forgiven. Unsecured Promissory Note: Carol purchased a home in 2005 for $300,000. She used "80/20 financing" and took out a primary loan for $240,000 and a second loan for $60,000. The loans were through two different lenders. In 2009, the fair market value of the home was is $175,000 leaving Carol with negative equity totaling $125,000. She decided to do a short sale and signed a purchase agreement for $175,000. The short sale was approved by the primary lender with full forgiveness of the $65,000 deficiency balance and $2,000 of the proceeds allocated to the second loan. The second lender approved the short sale with a minimum payoff amount of 10% of the balance ($6,000). Carol didn't have the cash available to pay the remaining $4,000 of the settlement offer out of pocket so the second lender gave Carol the option of signing an unsecured promissory note in the amount of $12,000 (double the amount of the settlement offer) at 0% interest payable over a five-year term. Carol agreed and signed the unsecured promissory note agreeing to payments of $133/month for 60 months. |