Going through the short sale process with the bank can feel a lot like a soap opera. One minute everything seems to be going well and the next minute the short sale is on the brink of failure. One of the situations that can really cause problems is when you receive a short sale approval letter with a promissory note attached.
What this means to the homeowner is that the bank will only approve the short sale if the homeowner agrees to sign a promissory note for all or a portion of the shortfall owed. The deficiency is basically the difference between what the bank loaned you and what you ultimately get from the short sale transaction. Obtaining that promissory note can be very harrowing and often brings the short sale process to a screeching halt.
The promissory note is basically a new loan that the bank wants the homeowner to sign to cover the loss from the short sale.
Some things to note about the promissory note are:
1. If the note is not signed by the homeowner, the short sale is dead
2. The promissory note is not tied to the property in any way and is considered an “unsecured” debt (like a credit card)
3. The note may actually have very good terms regarding the length of the loan and interest. Some homeowners can handle the low payment terms that the bank states in the note.
So what are the owner’s options in this situation? Here are some possible options:
1. Do not sign the promissory note and press the bank to see if they will withdraw the promissory note as a condition of short sale approval. This happens on rare occasions. Good negotiation skills are needed.
2. Don’t sign the promissory note and let the short sale process die and the house go to foreclosure. This isn’t usually the most fun option, but it may be the only option depending on the homeowner’s financial status. If the owner is mentally willing to make the payments on the note but lacks the financial capacity, then this may be the only option.
3. Negotiate better terms on the promissory note before signing. The bank may agree to some changes to the terms of the note, including the length of the loan, the interest rate, and the amounts of the monthly payments.
4. Sign the note. This option allows the short sale to proceed. Foreclosure is avoided and a much smaller payment is owed to the bank each month.
5. Sign the note and then pay off the debt in the future. Going this route takes a bit of courage, as you must first sign the promissory note, and then try to approach the bank after the fact to negotiate a one-time settlement payment for a fraction of the original promissory note amount. Since it is an unsecured debt and is usually handled by their collections department, they may accept the one-time settlement option.
It goes without saying that each bank and investor that backs the loans has its guidelines and policies on the notes. It is important to understand the risks involved and weigh the cost vs. benefit of any decision made on the promissory note. Either way, the ultimate goal should be for the owner to move on with his life.
