Short Sales and Promissory Notes – What Options Does a Homeowner Have?
Going by the short sale course of action with the bank can be a lot like a soap opera. One minute everything seems to be going fine and the next minute the short sale is on the brink of failure. One of the situations that can really cause a wrench in the works is when a short sale approval letter is received with a promissory observe attached.
What this method for the homeowner is that the bank will only approve the short sale if the homeowner agrees to sign a observe for either the complete deficiency owed or a portion of it. The deficiency is basically the difference between what the bank lent you and what they finally get back from the short sale transaction. Getting that promissory observe can be very distressing and often causes the short sale course of action to come to a screeching stop.
The promissory observe is basically a new loan the bank wants the homeowner to sign to cover their loss from the short sale.
Some things to keep in mind about the promissory observe are:
1. If the observe is not signed by the homeowner the short sale is dead
2. The observe is not tied to the character in any way and is considered an “unsecured” debt (much like a credit card)
3. The observe may truly have pretty good terms in respect to the duration of the loan and the interest. Some homeowners may be able to manager the low payment terms the bank lays out in the observe.
So, what are homeowner’s options in this situation? Below are some possible options:
1. Don’t sign the observe and push back on the bank to see if they will remove the observe as a condition of short sale approval. This does happen on scarce occasions. Good negotiation skills are needed.
2. Don’t sign the promissory observe and let the short sale course of action die and the home go to foreclosure. This is not usually the funnest option but may be the only option depending on the financial position of the homeowner. If the homeowner is mentally willing to make the payments on the promissory observe but does not have the financial capability then this may be the only option.
3. Negotiate better terms on the promissory observe before signing. The bank may agree to some changes to the terms of the observe including duration of the loan, interest rate and monthly payment amounts.
4. Sign the observe. This option allows for the short sale to move forward. The foreclosure is avoided and a much smaller payment is owed to the bank every month.
5. Sign the observe then settle the debt down the road. Going this route requires some courage since you have to sign the observe first and then try to approach the bank after-the-fact to negotiate a one-time settlement payment for a fraction of the original promissory observe amount. Since it is an unsecured debt and is usually handled by their collections department, they may agree to the one-time settlement option.
It goes without saying that each bank and investor backing the loans have their guidelines and policies about promissory notes. It is important to understand the risks involved and weigh the cost vs. assistance of at all event decision is made about the promissory observe. Either way, the end goal should be for the homeowner to move on with their lives.