Short Sale Deficiency Scenarios
If a lender does not agree to write off the deficiency in a short sale, what happens?
“In the event that the lender decides not to forgive the deficit in a short sale, typically the lender has two options. They can one, come after you for the difference later on, or two, decide later on not to pursue the difference. If they choose not to pursue the difference, they will typically issue a 1099 or a forgiveness of debt, which becomes an earnings that you would have to declare, or if they decide to come after you, they will typically go after the typical collections procedures.”
Short Sale Deficiency Scenario #1: No Bank Write-off
If a lender approves a short sale, will the deficiency automatically be written off by the lender?
“One of the things that are negotiated, in the process of a short-sale negotiation, is the deficiency that will remain. Remember, the short sale is selling the property for less than what it’s worth. By definition, there will always be a balance remaining. Sometimes, the lenders will forgive that balance. Sometimes, the lenders will not. They will just allow you to sell the property, but maintain their right to collect the deficit. One of the things that you need to do, is make sure in your short-sale negotiations, that you are, in fact, requesting, and the bank is accepting, a waiver of that deficit.”
Short Sale Deficiency Scenario #2: Waiver of Deficiency
What is a waiver of deficiency?
“A waiver of deficiency occurs when the bank has a debt that they’re owed and they decide to forgive that debt. If you’ve got a balance remaining after the sale of collateral, for example in the instance of the sale of a home at an auction, and the bank is entitled to receive a certain amount that was not paid off in that judgment, when the bank decides to waive or forego or stop pursuing that amount of money, they agree to a waiver of deficiency.”
