What is a deficiency release in a short sale?
Deficiency is what’s leftover on the note. For example, let’s say you owe $300,000 on your loan and your Real Estate Agent received an offer for $275,000. If the $275,000 is what the lender NETS when the sale closes then there is $25,000 in deficiency left. New Hampshire and Massachusetts are recourse states meaning legally they collect the balance of your loan. This means your lender can legally try to collect the $25,000 after closing. We always try to get an approval letter that releases the deficiency, meaning the lender releases that $25,000 after closing. They agree not to pursue the homeowner post-closing. This is never a guarantee, but in most cases will happen. Don’t go into any short sale guaranteeing you can get the deficiency released. You may end up with your foot in your mouth.
If you have a loan owned by Freddie Mac and or Fannie Mae’s they actually require any second mortgages to release any deficiency on the loan if they take money out of the proceeds of the sale. So, for instance, both entities give $6,000 to a junior MORTGAGE lien holder. If you, the homeowner, owe $20,000 to a home equity line, Freddie and or Fannie will offer 6K to release it FULLY. So at closing $6,000 will be issued to the equity line to be paid off. If the equity line agrees to accept the 6K out of proceeds they MUST release the remaining $14,000, in full per the Freddie and Fannie guidelines. They cannot come after the homeowner for the remainder after closing.
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