How often do banks ask the homeowner for money?

Question

I talked to a guy today and he basically just left the house he was in. Yeah he has other reasons but he could have stayed in it and could have paid it but wanted out of the house and area. 
          
          He has 2 loans on the property and is making a pretty good salary while living in a house on the other side of the valley. Now I understand banks "reserve the right to ask for money" for the difference after it has been shorted, correct? Will this be pretty likely if they guy is making a pretty good salary and the home is way upside down?
          
          Sorry I am new to this, but I am getting better! It gets easier every time and then I got bombarded with questions, haha. Thanks guys!

Justin S. · Answer

If he does not qualify for a hardship, then it won't matter cause the banks won't even look at it. Have him first put together an income/expense report. If he shows negative cash flow then you probably have a case. If he doesn't then it is probably not worth your time.

P.S. No need to apologize for asking questions. It's what this forum is about. :)

P.S.  No need to apologize for asking questions.  It's what this forum is about.  :)

James Ward · Answer

Matt,

And here is the answer you were looking for: Yes and No.

Sorry, but let me explain.

Yes- it can assist in getting the Lender(s) to not pursue any monies to be contributed by the property owner, assist in the Lender(s) fully releasing the Lien, and also assist in the Lender(s) not pursuing to get a deficiency judgement.

No- none of this will happen unless it is written in the acceptance letter.

And then one(1) more point, the Lender(s) do not have to agree to any of these items.  You must add these items to the list of things being negotiated.

Keep asking questions if you are still confused.

Derek W. · Answer

It is tough on a national discussion board when talking about State specific laws, so make sure you check anything said here against your specific state's laws.   Though California and Arizona are very similar in their foreclosure laws, they still have differences, so I still wouldn't feel good about advising someone from another state.  
Plus, two TOTALLY different things have been discussed that I want to make sure you understand.
There is a deficiency judgment which is a civil law suit that may happen after a foreclosure where a lender basically sues for damages and gets a judgment for the borrower to pay a certain amount, garnish wages, etc.
Seperately you may have the lender ask the borrower to "contribute" money or sign a promissary note prior to a short sale closing as a condition to close.  This happens most often with seconds.  This is not a deficiency judgement.  It is voluntary, but may need to happen in order for all parties to sign off a full lien release.  Like Crosswind said, make sure to look at the written short sale agreement prior to the close of escrow to see what the lender's terms are.

James Ward · Answer

Matt,

You should be requesting in EVERY short sale you do for the Lender(s) to:
1) Fully release the lien
2) Agree to no deficiency judgement
3) No monies of any type from property owner on sale

All should be placed in a contract/ addenda.  Any of these the Lender(s) agree to, should be in writing.

Hope this helps, and keep the questions coming.  It is better to ask here, than mess up a deal.  Most of us whom do short sales all the time will help in any way we can. (We find it fun!)

James

Scott Hubbard · Answer

Determine if he has a hardship as Justin has already suggested.  In addition, determine if he is going to be cooperative.  If he is living on the otherside of the Valley and you need him to go to the title company, will he be show up?

Also, if he owns other real estate, makes decent money, and the lender is countrywide or bank of america, there is a good chance they will want the seller to contribute in the form of cash at closing or a promissory note.

Mitch Freed · Answer

Purchase money should be non-recourse...take a look at the original promissory notes.  There might not be a deficiency clause in them.

The money was lent against the house...not the balance of the checking account.

However, if either of the loans is a HELOC or re-fi used for reasons other than the original purchase...then there may be a deficiency clause in which case they will pursue the homeowner after the short sale is completed.

And as far as the hardship goes...if the borrower decides not to pay the mortgage...of course the bank will look at a short sale even if the borrower has money...is the outcome any different if the property goes to foreclosure?

James Ward · Answer

For the tax question refer to H.R. 3648

[url]http://www.govtrack.us/congress/billtext.xpd?bill=h110-3648#

Plus, Jon is right.  But I always tell a client that has tax questions: "I am not a CPA, you should go and ask a CPA these questions.  They will be able to help you more than I ever will, in regards to answering these questions."

James Harkness · Answer

I'm not a CPA, but I am an asset manager.  To answer your original question, I always require money from the seller in a short sale.  Not to say that we are going to go after the entire deficiency balance, but ALWAYS require a promisory note.  Usually in a small amount of about 5k to 10k.  Most people don't have a problem with this as it is only 30-50 dollars a month, and we are excusing them of a lot of debt owed to us.

For your other question regarding taxes.  They will be taxed (again, not a CPA but I am confident in this information) on the definiciency amount.  So if they owe 200k and we do a shortsale for 150k, they will be taxed on the 50k.

Jon Holdman · Answer

There are a couple of exceptions on the taxes. If its a primary residence, and if the forgiven debt was ONLY acquisition debt or debt used for home improvements, then the taxes can be forgiven.  If the owner HELOC'ed all the equity out and went on a month long Vegas bender, sorry, its taxable.

The other exception is if the owner can show insolvency.

Matt DuSold · Answer

Alright awesome, got it! So new question... I dont think its really worthy of a new thread.

Talked to another person today and she was worried about paying taxes. She said she didnt have any money to pay taxes so she wanted to talk with her CPA about it. So question being if they go through with a short sale what taxes do they have to pay?

How often do banks ask the homeowner for money?

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