Southwest Florida Title Insurance & Real Estate Blog -

Short Sale Process - Old Mortgage Note

This is the 2nd tip of “10 Questions You Should Ask About Florida Short Sales” eBook, which is available as a FREE download.

In a nutshell, the lender’s right to pursue you for the deficiency after a short sale stems from your obligation to the lender under the Note. If you remember, when you took out your home loan (whether to refinance or to purchase), among the hundreds of pages were two very important documents:

  • The Note
  • The Mortgage

To understand the basis for the lender’s deficiency rights after the short sale process, it is important to understand the distinction between these two documents and what happens to them in a Florida short sale.

The Note is your personal promise to repay the sum you borrowed from the lender. The Mortgage, on the other hand, is the security instrument or the pledge of your interest in the real property as collateral for the amount borrowed. In the short sale process, the lender must agree to release its Mortgage lien against your property so that the title insurance agent may issue a clear policy of title insurance to the buyer. However, Florida law does not require your lender to release or cancel your Note obligation. Unless your lender explicitly releases you from future liability in its approval letter, it should be clear that they can pursue you for the deficiency under Florida law.

10 Questions You Should Ask About Florida Short SalesYou will rightfully wonder what is this “deficiency.” The deficiency is basically the difference between what you owe your lender at the time of the short sale and what the lender nets from the short sale. Let’s look at a very simple example. You owe $250,000 to your lender on a property that is worth only $200,000 and you must sell the property. For the sake of easy math, let’s say that a buyer offers $200,000 to purchase your property and that your closing costs (real estate commissions, title insurance-related fees, etc., which will likely be absorbed by your lender) are $15,000. The net to your lender from the short sale would be $185,000. And thus your “deficiency” would be $65,000 ($250,000 minus $185,000).

In the worst case scenario – where the lender retains the right to pursue you after the short sale – your lender could sue you for that deficiency amount. In Florida, this requires litigation and, not surprisingly, litigation costs money. The statute of limitations for this type of action in Florida is 5 years from the date of default. That is to say, should the lender retain its right to pursue you for the deficiency it would essentially have 5 years from the date of your default to bring that action. If the lender successfully litigates the issue and gets a judgment against you, it may file the judgment in Florida (essentially in the public records of any county where you may own property) and that judgment is valid for an initial period of 10 years. At or near the end of that initial period, the lender may re-certify the judgment which validates it for another 10 year period. After 20 years, the judgment becomes ineffective by operation of law.

One of the most important things for you to consider after you’ve thought about these technical issues is how the potential worst case scenario deficiency judgment could affect you. The effect of a money judgment is governed by state law. A full analysis of the effect of a money judgment is beyond the scope of this eBook.

However, I cannot stress enough how important it is for you to vet this issue with independent legal counsel who understands debtor/creditor legal issues.
If you own property in other states or jurisdictions (including outside the U.S.), you should also discuss this issue with legal counsel in that state. A creditor with a judgment from Florida can domesticate that judgment in other states, which means that they could take it to the other state and file it there. The other state’s laws could result in a significantly different effect on you than Florida’s. This is especially important if you might have bought investment properties or a second home here in Florida but make your primary residence in a different state.

At this point, you should understand that your lender may have the right to pursue you after your Florida short sale; what the deficiency is; how long your lender has to initiate an action to pursue the deficiency; how long a judgment could be valid against you; and the importance of finding out just how a judgment could affect in the worst case scenario.

My point is not to scare you or to dissuade you from moving forward with your short sale. Instead, I want this eBook to act as a guide to help you decide whether or not a short sale is the right thing for you. And I want you to be able to make that decision as early as possible to the extent that you can so that if you decide to move forward you can do so with the commitment that will be required of you to complete the short sale process.

Part of making a sound decision is using all of the resources and data available to you. Because the real estate market and economy in general have resulted in so many short sales over the last few years, there is a significant amount of data available related to deficiency rights. For example, you have access to prior short sale approval letters, which are very instructive since many lenders and servicers rarely change the language in their approval letters. While the past is  not a guarantee of what will come, you can at least use these resources to prepare as best you can. Along those same lines, some rather simple research will allow you to determine how many post-short sale deficiency suits have been brought by lenders. You should find that there have been very few thus far.

Make the best decision that you can about regarding your Florida short sale process. Please don’t hesitate to call me at (239) 985-4142 or contact me online if you have any questions. I’m here to help you!

All the best,

Chris Black , Esq.
Winged Foot Title, LLC.

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NOT LEGAL ADVICE: This information is not to be construed as legal advice. Legal advice must be tailored to the specific circumstances of each case. Every effort has been made to assure that this information is up-to-date as of the date of publication. It is not intended to be a full and exhaustive explanation of the law in any area. This information is not intended as legal advice and may not be used as legal advice. It should not be used to replace the advice of your own legal counsel.

Winged Foot Tite, LLC is not associated with the government, and our [short sale orchestration] service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan.