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Minnesota Short Sales and The Resulting Real Estate Deficiency

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By : Chuck Harris    99 or more times read
With the increase in the number of foreclosures and short sales in Minnesota and throughout the United States more and more Minnesota homeowners are concerned about being served with a deficiency judgment. A deficiency is the difference between the principle balance due on the promissory note and the amount that the lender receives upon the sale of the house. Since many people facing foreclosure or short sale are struggling financially they fail to obtain the necessary legal, tax and real estate advice in advance which would have simplified the complicated terms and conditions resulting in a surprise deficiency judgment notice. Furthermore, most Minnesota homeowners do not realize that they are required to request that the lender provide a release from future obligations.

When you signed for your mortgage you also signed a promissory note known as a promise to pay. The promissory note also included a personal liability which entitles the lender to legally pursue you for the amount outstanding. A promissory note is secured by the mortgage or trust deed and is filed in the land registry office and gives the public notice that the house has a lien against it. This mortgage or trust deed is secured by the value of the house.

There are 36 states in which the lender(s) can legally impose deficiency judgments. California, Arizona, Wisconsin, South Carolina, Washington, Pennsylvania, Oregon, North Dakota, Alaska, Iowa and Montana are states which do not allow the lender to impose deficiency judgments.

The deficiency judgment is calculated by taking the principle amount owed on the property and subtracting the amount that was received from the sale or auction of the property. For example, if you had a principle amount outstanding of $250,000 and the lender receives $190,000 during the sale process then you could very well be held responsible for the $60,000 difference along with any fees, penalties and interest associated with the mortgage.

As if that wasn’t enough, the Internal Revenue Agency considers that $60,000 as income to you. A qualified and reputable tax accountant can help you to file for a 1099. However, it is important to realize that the lender can only issue you a 1099 if they have agreed not to pursue a deficiency judgment. In other words, you can get one or the other.

There are a few differences in the process for foreclosures versus short sales and obtaining the appropriate legal, tax and real estate advice ahead of time will simplify the process and help you minimize the risks involved.

The risks don’t end there either. Should you choose to disregard the deficiency notice, the lender has the ability to pursue you regardless of where you live. They can demand your financial records and have your wages garnished. You may even face jail time.

Short Sale: In the case of a short sale, the house is facing foreclosure proceedings but is not yet in default and sometimes banks will agree to take less on the principle. In this case you would typically hire a Minnesota Realtor® to market and sell the house. The Minnesota Realtor® along with your real estate lawyer, tax accountant and attorney will all work together to help you. Most lenders have a preference for dealing with a Minnesota Realtor® as opposed to dealing directly with the homeowner. They will negotiate with the lender and can reduce or even eliminate the amount that you would be responsible for paying to the lender in the event of a deficiency.

A homeowner does not need to be in default with the mortgage to negotiate a short sale but must show substantial evidence of financial difficulty leading to an inability to pay the mortgage. Each lender has a specific process that must be followed. In most cases if the file is not completed properly it will be next to impossible to successfully negotiate a short sale.

Since as the homeowner you are initiating the short sale process you may be responsible for providing your lender with an appraisal report and other supporting reports or documentation. One negotiation tactic is for the homeowner to pay for these reports upfront in exchange for a written agreement from the lender that they will not pursue you for any money that is lost due to the short sale of the property.

It is important to note that most lenders will not stop foreclosure proceedings even when there is a short sale agreement in place. Lenders have the legal obligation to follow the established process right up until closing or the date that the foreclosure is scheduled to take place. In the event that foreclosure proceedings are finalized before the scheduled closing date, the lender has the potential to continue with the established foreclosure process and all work to secure the closing of the short sale will be lost.

Foreclosure: When the terms of the promissory note are not honored by the homeowner, the lender has the legal right to foreclose upon the property. During the foreclosure process the borrower (homeowner) is given the opportunity to bring the mortgage back into good standing with the lender. Otherwise, the lender proceeds with the foreclosure process, evicts the homeowner and attempts to find a buyer who will bid enough to pay off the lender. In the event that a buyer does not bid enough to pay off the lender, then the lender has the option to put the house up for auction.

When the house sells during the auction the proceeds to the lender are typically less than the principle amount that was owed on the house. This is when the deficiency judgment comes into play. In some states the promissory note signed by the initial homeowner makes that homeowner personally liable for the outstanding debt. To further complicate matters, most homeowners have more than one lien against the house. Common examples are second mortgages, lines of credit (in which the house was used as collateral) and construction liens (for work that was completed but not paid for).

Since there are differences from state to state it is of the utmost importance to obtain legal, tax and real estate advice as soon as possible. Knowing the financial ramifications ahead of time will allow you to plan ahead and make the appropriate arrangements and in some cases even negotiate with the lender(s).

There are 36 states in which the lender(s) can legally impose deficiency judgments which are permitted by the terms of the promissory note that you signed with your mortgage. Most homeowners do not realize this and since they are already struggling financially they fail to obtain legal, tax and real estate advice that could alleviate the stress and financial impacts of receiving a “surprise” deficiency notice following the sale of the property.
Chuck Harris is the founder of Agents Ranking; a Minnesota company that helps home buyers and sellers throughout Minnesota connect with the best real estate agent for their particular needs. Agents Ranking provides a unique consulting service free of charge to anyone who wants the best Minnesota REALTOR® possible. You can know more at

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