Under current California law, any lender who agrees to a short sale, which by definition is a sale that will yield insufficient funds to cover the outstanding loans on a property, must accept those funds as payment in full for all loan balances. This is a good thing for upside-down homeowners who need to sell. Previously lenders may have had the right to pursue upside down sellers for the shortfall.
This law brings closure and certainty to the short sale process and ensures that once a lender has agreed to accept a short sale payment on a property, all lien holdersâ€”those in first position and in junior positionsâ€”must consider the outstanding balance paid in full and the homeowner will not be held responsible for any additional payments on the property.
But under water home owners may have a new concern. The current Federal law which excludes any forgiven debt in a short sale transaction to be excluded from taxable income is set to expire at the end of 2012. If the law is not extended the amount forgiven will be taxable if the transaction closes in 2013. With the current state of affairs in Congress, it is entirely possible that the law may not be extended. Upside down homeowners should take a real hard look at their situation and decide whether now is the best time to do a short sale.