With increasing numbers of Tampa Bay homeowners taking action to avoid foreclosure, I am receiving more phone calls asking about “deficiency judgments”. I have answered some of the common questions below:
What is a Deficiency Judgment?
If the loan on your Tampa home is not paid in full, a lender can ask the court for a “deficiency judgment” that allows the lender to file a lien on the funds owed. A deficiency judgment is a lien against a borrower whose foreclosure sale did not produce enough funds to repay the mortgage in full. Florida lenders can pursue a deficiency judgment for foreclosures, short sales and bankruptcies. In 100% of foreclosures in Florida, lenders are entitled pursue a deficiency judgment. In some Florida short sales, the lender waives the right to a deficiency.
Will the Lender(s) ask for a Deficiency Judgment?
It is impossible to tell in advance. Whatever a Florida lender asks for might be negotiated away. The fast-changing financial environment makes it difficult to predict what a lender’s policy will be 3-4 months from now. We have seen policies change multiple times during a short sale. In many cases the “lenders” have sold your loan to an “investor”, who will make the final decision about a short sale. We are also seeing investor’s policies change over time. In some cases, there may even be conflicts between the requirements of a first mortgage holder and the second mortgage holder.
Why do a short sale if a Deficiency Judgment is possible?
Tampa short sales usually result in a higher sale price and a lower loss to the lender; hence you will be exposed to a lower deficiency. Short sales stop the clock on additional missed mortgage payments, HOA dues, taxes, etc. The home will sell for a higher price today than it would after a year of neglect and further market decline (if current Tampa real estate market trends continue). Also, the lender will save the significant legal expenses of a foreclosure.
What impact will a short sale have compared to a foreclosure?
Missing mortgage payments impacts your credit score: the more payments you miss, the greater the impact. A well executed short sale can conclude within 4 months, whereas a typical foreclosure is now dragging on for 18 months. Under the new Fannie Mae guidelines (8-16-2008), the impact of a Foreclosure on a borrowers’ credit worthiness is considerable. Homeowners who have had a foreclosure will not be eligible for financing for a period of five years; whereas those opting for a Short Sale are eligible in 2 years. Every time you apply for a mortgage, car loan, home insurance, medical insurance, auto insurance, employment…. and you are asked if you have ever had a foreclosure, you can answer NO if you had a short sale.
Rather than becoming immobilized by the uncertainty, we recommend moving forward with the assumption that the lender will waive the deficiency. Thousands of Tampa Bay homeowners have successfully completed short sales in 2008, and you might be next.
- By Dale Bohannon
