A question I hear a lot is if homeowners will still owe money to the bank or government after foreclosure or short sale. This really all depends on how successful the short sale or auction was and how much their home sold for verses how much they owed on it. Even though the agreement is paid in full for you home when it is sold, it may not have been for the entire amount due on their mortgage, therefore they could be responsible for the difference.
If the mortgage balance is still not fully paid after their home has been sold, they may owe the difference between the mortgage balance and the discounted amount as a result of what is known as “deficiency judgment.” Deficiency judgment will affect the homeowner and their credit report after the foreclosure.
What a homeowner needs to do when they are in foreclosure and trying to possible get a short sale approved by the bank is to ask the bank to accept payment in full without pursuit of any deficiency judgment.
The difference between the mortgage balance and the short sale can possible be declared as income on their income tax return by means of a “1099.” Since most homeowners are in financial hardship, they have probably not made much income; therefore a 1099 may not adversely affect them.
How a 1099 works is that it is given to the homeowner as a result of income they’ve received. For example if the bank is owed $200,000 and agrees to accept $150,000, n a short sale, the homeowners actually made $50,000 (the short sale amount) and can receive a 1099 for that amount. Although it is highly recommended to speak with an accountant for final advice on the issue and how a 1099 may affect you the homeowner.
The bank can and usually will seek a deficiency judgment as mentioned above for the shortage on the actual amount received versus what was actually due, to pay off the mortgage. This judgment can be sought after not only on a short sale, but if the property sells at the courthouse or foreclosure auction for less than what is owed.
When negotiating a short sale, try to require that the bank waive its right to a deficiency judgment. Most of the time the bank will, because of the economic hardship around the country. This is important to work out with your lender especially if you are trying to get a short sale option approved, you do not want to be struck paying for the difference in prices. If you do not feel confident talk to you lender, start looking for a local foreclosure attorney to speak on your behalf and negotiate the short sale with them.
It is also important to realize that the lender cannot pursuer both a deficiency judgment and issue a 1099. The lender can only do one or the other. If the deficiency is waived as a condition to the short sale, the homeowner will receive a 1099. If the judgment is not waived, then the decision is up to the homeowner as to whether or not to pursue the deal.