If you cannot successfully negotiate a loan modification or refinance, you may need to sell your home. If you owe more than your home is worth, a “short sale” may be your best option. A short sale is where the lender agrees to let you sell your property for less than the amount you owe on the loan to satisfy the debt in full to avoid foreclosure. Homeowners often find themselves in this situation because the value of their property went down or the arrears have piled up faster than the property value has increased.
The reason why you will want to pursue a short sale is that you may be personally liable for the difference in the sale price of the home and what you owe to the lender. This is called a deficiency, which is important to understand if you are considering bankruptcy or the obligated borrower is deceased or judgment proof. If no one is liable for that deficiency then there is no point in pursuing a short sale or deed in lieu.
If you have more than one loan on your home, both lenders will have to agree to the short sale. In this situation, the second or third lien holder may get nothing, so they do not have an incentive to agree to the short sale. The subordinate lien holders are often given a small amount of money from the loan proceeds, with the consent of the first lien holder, so they may agree to the transaction.
If the seller agrees to the short sale, you will not owe anything more on the loan. However, you may have to pay income taxes on the part of the loan that is forgiven. The IRS may treat the amount forgiven as income to you but there are rules that may allow part or all of the cancellation of the debt. You should consult a tax attorney or accountant to determine whether you are exempt from paying taxes on the forgiven debt.
Legal Editors: Thomas Tilona and K. Scott Kohanowski, City Bar Justice Center Foreclosure Prevention Project, December, 2017
Changes may occur in this area of law. The information provided is brought to you as a public service with the help and assistance of volunteer legal editors, and is intended to help you better understand the law in general. It is not intended to be legal advice regarding your particular problem or to substitute for the advice of a lawyer.