Short sales arise when a homeowner owes more on their home than they can sell it for and they are having a financial hardship. The homeowner is “upside down“.
The homeowner then attempts to make an agreement with their bank to sell the house for less than is owed.
The term “agreement” is broad because it depends on the bank that holds the loan. Though there are general practices, every bank does it differently.
If you take part in a short sale, assume nothing until you have the bank’s agreement in writing.
Common Deficiency Agreements
A homeowners best situation is to get the lender to “write off” the deficiency. This results in the seller having a derogatory statement on their credit report. In this case the homeowner no longer owes the bank. The credit reporting can consist of anything from “account settled” to “foreclosed”. Negotiating this aspect of the short sale is critical for the homeowner.
In cases where the money is “written off,” it is important to understand that the lender will never actually “write something off.” In most states (check Colorado law), the lender has the ability to show any deficiency as 1099 taxable income to the homeowner. What this really means is that the seller might have to pay taxes on that income.
This information cannot replace the advice of your legal and tax counsel You should check with your tax accountant and look into the “The Mortgage Forgiveness Debt Relief Act of 2007″ to see what the effects of this legislation could have on your tax bill.
Another way the deficiency could be “written off” is in the form of a judgment. This will often occur in conjunction with the 1099 taxable income reporting. It might say something on the seller’s credit report such as “judgment filed against John Doe in the amount of $XY by ABC Mortgage Company”. This will appear in the public record section of the seller’s credit report for 10 years.
The debt can either show up as satisfied or unsatisfied. Satisfied is obviously the better option because it means the worst thing that can happen is the lender will report 1099 taxable income. Unsatisfied could be a problem because it means that a court has found in favor of the lender to collect the deficiency from you. Now, the lender might simply send you the 1099, or they might try to collect it from you. They can keep trying to collect it from you until they get it. They can garnish your wages. Your only hope at this point is to qualify for bankruptcy.
NEVER ASSUME THAT A DEBT YOU OWE A LENDER IS GONE UNLESS YOU HAVE THE DETAILS OF THE DEBT RELEASE IN WRITING.
Never assume the debt is released unless you have a formal, written, signed, unconditional release of lien and/or judgment from the bank specifically stating that no further action to collect this debt will be taken.
This is what we at the Home Source Group strive to do every day for our sellers. We do our best to get the bank to accept your short sale with no further liability for the deficiency.