The Deficiency Topic Dealing With a Short Sale
I was reading more about deficiency questions with short sales and I thought I would elaborate a little on the subject. When you get a lender to accept a short sale the amount of debt forgiven becomes a taxable event.
Example: Homeowner owes $250,000 on a house. The lender accepts $170,000 for it. The homeowner is responsible for paying taxes on the $80,000 forgiven amount.
First thing that is important to realize is this.
Not ALL states have the option to file/collect on a deficiency judgment
You may want to do some studying or contact a Real Estate attorney to find out which states have the ability to file/collect on a deficiency judgment.
Second is this. The homeowner is typically facing this REGARDLESS of your involvement.
For a better understanding of a deficiency judgment let’s define it.
Deficiency judgment
(understanding there are different types and this is a generic definition)
Legal action sought by a lender who wants to recover any losses on a foreclosure
If you default on a mortgage, the lender can not only sell your property to get their money back, but they can also sue you if the money from the sale isn’t enough to cover the loan. For example, if you owe a lender $100,000, but the lender only gets $90,000 in a foreclosure sale, they can take you to court for the remaining $10,000. If the lender wins, they can attack your assets, income, credit and peace of mind until you pay this amount. If you have Private mortgage insurance, a lender can use this money to offset any losses instead of getting a deficiency judgment. Keep in mind that only SOME STATES give the lender the right to a deficiency judgment.
OK… now that makes everything as clear as MUD…eh?
So…let’s put it in perspective for working a short sale…shall we?
The lender may choose to seek a deficiency if:
1. The state laws allow it
2. The loan type is “recourse” compared to “non-recourse”
How do you know what type of loan you own and what is the difference?
The original loan documents should state what type of loan you are dealing with. It is common to see first mortgages (loans put in place to actually buy real property) are “non-recourse” type loans. That means the lender does NOT have a recourse option to come back to the borrower to collect for owed debt to them.
On the other hand, second mortgages from refinances, Lines of Credit, HLOC’s, Equity Loans, ANYTHING with “cash out” type programs are usually considered “recourse” type loans. That means the lender CAN exercise the option to collect on any debt owed to them from the borrower.
When you are working with a homeowner and putting together the short sale option for them. You will need to deal with the deficiency issue if you want them to be informed about it. Contrary to the opinion of many “self proclaimed gurus”; I think it is a good idea to address the issue and not avoid it. Saying that, I also think it is very important to re-emphasize that you are not providing a legal opinion on the matter. You could state…
“Mr/Mrs. Homeowner if I were in your shoes, I might have a question about….” You get the picture. If you are not an attorney don’t portray one.
The homeowner can be faced with either a possible deficiency (if their state law and loan type allowed it), or the lender may choose to write off the debt and send the homeowner a 1099 at the end of the year. It would be a homeowner responsibility to claim the money as income. You can also get that amount reduced, but that is another conversation saved for a later article.
The fact that you will be dealing with the lender for the homeowner puts you in control position. You can tell the homeowner that you will submit your short sale offer to the lender with a contingency that all deficiencies are waived upon acceptance. You can make this a benefit for the homeowner agreeing to work with you. Typically homeowners will let the property go to sheriff sale and hope for the best. You are working with the lender in the short sale and can request they waive all deficiencies for the homeowner. Will they agree? Most of the time “yes”, sometimes “no”. You can tell the homeowner that you will do your best, but ultimately it will be up to the lender for rules of acceptance. Remember, the bigger the issue you make of this topic, the more concerned the homeowners will be about it. Speak with confidence to them and move on to the next topic as quickly as possible. If they have specific questions tell them to consult legal authority on it.
I hope this helps.
Remember … be a servant
Life has Ups and Downs so Enjoy the Journey,
but Stay Focused on Where You Want to Go
Cory Boatright
Loss Mitigation Specialist
cory@shortsalefundamentals.com
www.shortsalefundamentals.com
Thank you for sharing!
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In states with anti-deficiency laws, can PMI carrier recover from the borrower/insured through a subrogation action?
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