We hear the term deficiency balance, when we are talking about Massachusetts Short Sales or Foreclosures. It is the biggest concern for a home owners going through a short sale or facing a foreclosure.
What is a deficiency balance?
A deficiency balance is the difference between the amount owed on a loan versus the price for which the home is sold. For example: If he home has a total balance of $420,000 owed on the mortgage and is eventually sold for $280,000, the deficiency balance is $140,000.
What Happens to the Deficiency Balance in a Massachusetts Short Sale?
A short sale offers many advantages over a foreclosure when it comes to the deficiency balance. In a short sale, you have some control over the how the deficiency balance is handled. In a short sale, my short sale team works hard to remove the opportunity for the bank to pursue a deficiency judgment. This is where the bank/lender approves the short sale and reports the mortgage as settled to the credit agency, basically the amount of the deficiency balance is forgiven by the lender.
A second scenario would be where the lender approves the short sale and retains the right to go after a deficiency judgment (I will address the deficiency judgment later). One thing to remember, if the lender retains the right to go after the deficiency judgment, this does not mean that they will. Usually if they will, it will happen with in the first 6 months after the short sale.
Lastly, we can see the banks ask for a small amount of money at the closing table to or a no interest personal note at the closing table. Most of the time in this scenario they will agree to write off the loan as settled.
The one thing to remember about short sales is we can never predict the outcome of a short sale and the outcome is negotiated for the best possible terms, for you the seller, that the bank will accept. At least in the short sale, you have the opportunity to negotiate and have some control the over the outcome of what happens to a deficiency balance, where in a foreclosure the deficiency balance is automatically established.
The Deficiency Judgement
Basically if the lender/bank pursues the deficiency balance, you will be “sued” by the bank and the courts will order you to pay the remaining balance. You will be responsible for the deficiency balance. I believe in the state of Massachusetts a lender has 2 years to file for the deficiency and 20 years to collect.
What can happen after a judgment is levied:
- Wage Garnishing – Many states allow lenders who win such lawsuits to garnish your wages, which can mean you may lose up to 25% straight out of your paycheck each pay period, something you definitely want to avoid.
- Liens - If you own other property, the lien will make it such that when you sell the property, you have to pay the lender what you owe on the deficiency balance before you get to access any proceeds from the sale of that property.
- Damaged Credit – An unresolved deficiency balance will significantly affect your credit score in a negative way, affecting your ability to secure credit in the future.
- Loss of Savings – The judge may order you to pay off the debt through the seizure of another bank account in which you have money.
If you are involved in a short sale or a foreclosure, it is highly recommended you consult an attorney so you understand the ramifications of the short sale and the short sale approval or the foreclosure.
If you are a Massachusetts homeowner that has missed mortgage payments, or facing foreclosure or a home buyer interested in buying a foreclosure or short sale call Kevin at 978-360-0422. I will explain your possible options to foreclosure. Every situation is different and you have about five options to consider. If a short sale is your best option my short sale team will work to complete a successful short sale on your home. Combined we have successfully closed 100′s of Massachusetts Short Sales. My closing ratio is almost 100% on Massachusetts Short Sales.
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