We are starting to see more and more lien holders send short sale approval letters where they are releasing the seller from their lien but not including the all-important language stating they will not pursue the seller for the deficiency balance. Just another trend in the ever changing world of short sales. The lien holder is holding the deficiency language out of the approval knowing that most sellers in Nevada will not complete a short sale without the deficiency waiver language being included. So begins the negotiation.
Banks may choose to ask for a cash contribution if the seller falls into any of the following categories:
Seller Has Disposable Income.Most lien holders will examine the seller’s bank statements, tax returns, and credit report to determine how much money is coming into the household and how much is going out. If they can determine that there is money left over they will ask for it. If they see available balances on credit cards or money in investment accounts they will ask for the contribution.
Seller Has Refinanced With Cash Out. If the seller refinanced and took cash out for boats, RVs, or spent the money on things not related to the home. The lien holder may look to get paid back for this amount.
Investor Guidelines Require a Contribution. If the investor that owns the mortgage has guidelines that state all sellers must make a contribution the servicer must request this from the seller.
Seller Has No Financial Hardship. If the seller cannot prove a financial hardship, and the seller still has a strong cash flow or investment income, often times the bank may consider the short sale but will ask for the contribution.
State Laws On Deficiency Judgments. In Nevada, if the first mortgage was taken out prior to October 1, 2009 the lien holder has up to 6 years to sue the seller for the deficiency balance. Second lien holders have 6 months. Most lien holders know this and know that they can use this as leverage to get the seller to make a contribution.
There are 2 types of contributions a seller might be asked for – CASH or A Promissory Note.
Cash Contributions – These can range from $500 – $20,000 or more. Typically they look for 2-10% of the short fall. There is no set formula. This amount is typically negotiable, but if mortgage insurance is involved the amount may not be negotiable. These funds are typically paid by the seller via escrow before closing.
Promissory Notes – These are unsecured notes that typically require a higher amount than cash contributions as they pose more risk to the lien holder. They are most often non-interest bearing for terms from 3-15 years.