One of the conditions of a short sale is that the seller/borrower does not receive any proceeds from the sale.
In a recent short sale agreement the lender wrote the following:
"The sellers will not receive any proceeds from this short sale transaction. If there are any remaining escrow funds or refunds they will not be returned to the seller, they will be sent to Countrywide to offset the loss"
Most lenders will ask you to sign an assignment of unearned premium refund. This is a document signed by the seller/borrower addressed to the insurer whereas the insured cancels the policy and requests the insurance company to refund to the Lender all unearned premium and or unpaid claims.
Unfortunately, you will not see any money coming back to you and I understand that, in a situation where you lose your home and also your down payment, all extra income is welcome.
But look at it this way, you won't have a deficiency judgment filled against you and the payoff will show up in your credit report as a partial payment and a settled debt.
With a successful short sale the seller/borrower will be able to get a new mortgage after 18 months. Not bad when you look at the loss that the lender takes.
That is why I recommend a short Sale as the best solution to people that are facing a hardship and are 'upside down' on the mortgage.
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