Many people do not know that short sales stand a much better chance of approval as oppossed to a loan modification. However, there are a variation of outcomes that can occur. Mainly, the inconsistency involves how the lender deals with the deficiency. Here are some of the current outcomes being seen in the market place:
- The lender forgives the short-fall between what is owed on the home and the agreed upon sale price. This is also known as a full satisfaction. This is usually the goal with short sales and happens more often with a first mortgage. Sellers will receive an IRS 1099 form for the forgiven amount and the Seller will be free of all debt and any future obligations.
- The lender approves the short sale as a lien release. Therefore, the lender still expects repayment of the loan from the borrower and has not written off the deficiency. The lien is removed from the property and repayment plans are discussed between the borrower and lender after settlement. This is more likely with second mortgages.
- The lender release or forgives the debt owed, but the Seller agrees to sign a promissory note. The terms of a promissory note are often negotiable and usually favorable to the borrower. The lender only writes off part of the deficiency balance and the seller repays the unsecured bank note back after final settlement occurs.
- The lender releases or forgives debt after a cash contribution by the Seller. These contributions can range from $2,000 to $15,000 depending on the homeowner’s financial situation.
This should shed a bit more light on what happens during the lender approval process. As always, feel free to contact me with questions.