Home Selling in Seattle>Question Details

Unsure Seller, Home Seller in Seattle, WA

If I have to do a short sale on my home, will I have to pay the difference between the selling price & what I still owe?

Asked by Unsure Seller, Seattle, WA Mon Aug 15, 2011

How does selling my home in a short sale affect my credit rating? Can my mortgage company take away my second home?

Help the community by answering this question:


To answer your questions:
- Maybe, its up to the bank.
- Sends it into the toilet. Unless you pay your debts on time and in full, your credit suffers.
- Not until it has a judgment against you.
And finally, my standard admonition: Consult an attorney, not a blog, for legal advice.
Web Reference: http://blackmonholmes.com
2 votes Thank Flag Link Tue Aug 16, 2011
John Stewart wrote: "Washington is a non-recourse State, meaning that the primary mortgage on your primary residence is typically protected from creditors if you are in a distressed situation; second mortgages or Equity Lines are not. "

That is not quite accurate. In Washington state an entity which non-judicially forecloses (the most common method) cannot pursue a deficiency. This is true regardless of whether they are a first, second, HELOC or a refinanced deed of trust. The key point is they have to non-judicially foreclose for this protection to apply. In this market, typically only a first position deed of trust will foreclose, but that is not always true. I have recently seen second deeds of trust foreclose. It's an open question what happens if the same entity holds the first and second deed of trust, and non-judicially forecloses the first. I think it's most likely the second is still owed, but that could turn on many facts.

To answer the question asked, they should really consult a real estate attorney about the short sale process. Note, however, that the bank will need to actually forgive the debt for it to be no longer a concern. I've seen agents misinterpret language in bank documents as a release, so again, when you get to that point the banks' documents should be reviewed by an attorney.

Finally, if you do want to proceed with a short sale, you will need an agent that is experienced in handling them, and has relatively good results getting such sales closed. Most short sale listings never close, so selecting the right agent is important. (BTW, I don't do short sale listings.)
2 votes Thank Flag Link Tue Aug 16, 2011
There are many variables which can affect the answers to your questions. When I list a home as a short sale, I strongly encourage my clients to meet with an attorney who will discuss all the options and consequences with them and apply the answers to their specific situation.
In general however, there are two possibilities regarding the unpaid balance; the lender(s) may accept payment at the agreed upon short sale price and forgive the deficiency or they may retain the right to pursue it at a later date. If the debt is forgiven, there may be tax consequences whereby you are issued a 1099 for the forgiven balance and the Government will consider it taxable income.
Your credit will be affected by a short sale, however generally less so than in a foreclosure or bankruptcy.
Your second home, and all of your income and assets will be disclosed to the lender in the process of the short sale, but I don't believe the first lender can attach other property. A second lender, if you have other liens on the home possibly could, and this would be a good topic for the attorney to address completely.
Sorry for your circumstances, I hope you get the answers you need.
2 votes Thank Flag Link Tue Aug 16, 2011
A short sale will enable the seller to purchase a home about 2 years after a short sale completion while a foreclosure will make you wait 5 years. In addition, short sales are better for the lender and it will keep the house occupied, with water and electricity still on and also keep the lawn mowed. Plus the bank will lose less money through a short sale.

No Foreclosure - foreclosures can be a hard and stressful process for a family.

Being Proactive - facing a foreclosure head on will help give you some control over the process.

Start Newer, Faster - minimizing damage to your credit can help you and your family get back on your feet faster.

May not owe anything after the short sale - you can try asking the bank to cancel your debt altogether. It does happen, but not all the time. Primary residences are usually treated more favorably by the lenders.

There is still damage to your credit - when a short sale is done, it is still documented on your credit but won't have the same impact as a foreclosure for most creditors.

Tax Consequences - there may be tax consequences if the bank forgives the debit and will issue a 1099 to the IRS for the amount of debt forgiven.

Bank could demand payment for their loss - the bank doesn't have to forgive the debt. They are able to ask you to pay them back for the difference on the sale and what is owed, but you will need to agree to this.

There are no guarantees in a short sale - whether the bank will approve the sale or forgive your debt, but short sales offer a better alternative to minimize the downside of facing a foreclosure.

Disclaimer -There can be legal and tax consequences. You may want to consult with an attorney or tax specialist before attempting a short sale. A real estate agent cannot give you legal or tax advice.
1 vote Thank Flag Link Wed Aug 17, 2011
This will greatly depend on your financial situation, meaning, was this your primary home? Did you refinance this home? Are you financially insolvent?
I would highly suggest speaking with a very good, skilled CPA! This is very important regarding this matter. I have helped hundreds of people regarding these issues, should you need a great CPA I would gladly recommend one.
Depending on what the lien holder ( investor ) will do you might receive a 1099C or a full release to satisfy the debt(s) if you have a second mortgage they could release with no deficiency, have you tried to find out if you are on a FNMA or Freddie Mac Loan - have you applied for HAMP / HARP program? Go to http://www.makinghomeaffordable.gov/get-assistance/loan-look…
Have you contacted your bank to let them know your current financial postion or situation?
Make sure to exhaust all your efforts and if you are looking for any help that is what I am here for.
Good luck and you will get through this.
I hope this is helped.
Margo http://www.SeattleMargo.com/blog - here you will find some very good article and blogs that I have written and posted regarding this topic
Web Reference: http://www.SeattleMargo.com
1 vote Thank Flag Link Tue Aug 16, 2011
Depending on what your approval letter states, recently majority of lenders are not including deficiency, however you may get a 1099 and if primary residence you can get forgiveness of the debt from the IRS
0 votes Thank Flag Link Fri Apr 27, 2012
I cannot give you any advise, however, I can share with you my experience...

Having closed over 50 short sales I can tell you this; They are not easy and "Short" does not mean "quick". Make sure you find a qualified Broker to list you home...

To answer your question; Putting all Sub-Prime loans aside, there is a very small chance that you may have to contribute to close the short sale. It all really depends on the Lender, Investor, how many loans are on the property. most importantly, if there is Mortgage Insurance?

My experience has been this, the first mortgage may ask for a seller contribution either in the form of cash at closing or a unsecured promissory note if there is mortgage insurance against the loan. There may be mortgage insurance that was placed on the loan without the homeowner ever knowing which is different from PMI. The lender or the MI company may ask for if but you do not have to agree to it and they do not have to approve the short sale with out it. If you have a true hardship then I wouldn't worry to much about it. If you are trying to walk away from an upside down mortgage and you have good income and assets, then I would expect it them to ask. Because they ask for it does not mean that you have to agree to it, and if you don't agree, that does not mean they will not accept a short sale.

If there is a second lien holder and they are not attached to the first lien holder, then chances are they will want cash at closing or a promissory note. If the second is attached to the first then chances are the first will will internally negotiate with the second and they will come to an agreement.
There are so many elements to a short sale and from my experience, no two lenders or servicers are alike. Right now, I hear that Chase is offering thousands of dollars to home owners to short sale and I am not talking about the $3000 HAFA money. The banks have finally figured it out that this market is here to stay for a while. Wells Fargo has finally got onto Equator(Automated Short Sale Submission and Tracking Management) and they claim that they have built a Short Sale Department and they expect to be in the short sales business for the next ten plus years. Bank of America is recruited brokers to go and offer the short sale alternative to homeowners...

Keep in mind and I hope this is not an option, but if the home was be foreclosed on with a non judicial foreclosure, which the most common in the State of Washington, the first lien holder regardless of mortgage insurance, can not seek a deficiency. If there is a second lien, they may, but chances are they will accept a pennies on the dollar settlement.

There may be tax consequences, but if you have lived in the home two of the last five years then I wouldn't worry. I would recommend talking with your accountant.

My only advise is to find a qualified Broker to list your property. A qualified Broker will not tell you that they guarantee you full forgiveness as they really don't know for sure. Find a Broker that is not going to hand off the short sale negotiations off to a third party who will ask the buyer to pay thousands of dollars out side of closing to facilitate the short sale. That thousands of dollars could be applied to purchase of the home minimizing your liability, if any?

Good luck!!

"Mans mind, once stretched by a new idea, never regains it's original dimensions" -Oliver Wendell Holmes


Jeffrey A. Costello CRS, ABR, CNE, CDPE, CIAS
RE/MAX Integrity

"Never forget: the secret to create riches for oneself is to create them for others."
-Sir John Templeton
0 votes Thank Flag Link Tue Aug 23, 2011
Wow, this is alarming! There are to many people giving lending advice, and the big problem is that a lot of it is outdated, and flat out incorrect. The bottom-line on a short sale is this: It will negatively affect your credit, but not as bad as a foreclosure. Because so many people are doing whats called a strategic default, FNMA, FHLMC, HUD, & VA have been consistently tightening the penalties for those who go this route. Suzy Ortman, author, TV show host, and licensed financial advisory is even recommending this to people that are upside down on their homes. I am a licensed Mortgage Lender in Washington State # MLO 140972, and I CAN NOT give or condone advice one way or another! However, I can give you some facts: The IRS has a capital gains forgiveness policy that expires December 31st 2012. If you do a short sale or default, the difference between what was owed on the house, and what the lender is able to sell it for is considered a capital gain by the IRS; Jan 01 2013 you will be liable for that difference. In addition Washington State allows the lender to go after the amount forgiven (difference between what the home sold for and what you owed) if you do a short sale. There is no guarantee that at some future date the banks will not get greedy, and try to collect on this amount unless you hire an experienced real estate attorney who puts that verbiage in whatever arrangement they work out for you. In addition, when it comes to advice I have found it's often worth what you pay for it, and that goes for mine as well. Don't take anybodies word for anything with out doing your own due diligence first.
Web Reference: http://steveharkness.com
0 votes Thank Flag Link Sat Aug 20, 2011
Hi Unsure Seller,

If you have the money to pay the difference between what you owe the bank and the selling price, you can choose to bring the money to closing to pay that difference.

To do a Short Sale, you must have a "hardship", which means you have had undo medical expenses, lost your job, had a job transfer of more than 100 miles, etc. If you have a second home, you may be able to get a line of credit on that home to pay to close your current home.

With all the publicity about Short Sales in the media, I feel some basic concepts have gotten misconstrued. You borrowed the money to buy this home and if you have the resources to keep it and if you don't have a "hardship", you can't do a short sale. A short sale is a mitigation with the bank to keep the bank's losses to a minimum and settle a hardship for you. Outcomes often include promissory notes for you to pay all or part of the loss over time, a release of the bank's right to pursue a deficiency judgment, and a 1099c for you because when a bank releases you from debt, it is considered income to you.

Each short sale situation is complex and there are a myriad of options, so I invite you to call me for a consultation. If you don't have a hardship, you may even choose to turn your home into a rental property.

Warm Regards,
0 votes Thank Flag Link Wed Aug 17, 2011
Derrick wrote: "You will only owe the lenders money on the "difference" or Deficiency Balance as it's called, if the loans You have on the the property have recourse. If they are non-recourse, then You won't owe anything. Talk to a Real Estate Attorney in WA to figure that out first. "

Washington is different than California in this area of the law.
0 votes Thank Flag Link Wed Aug 17, 2011
It's best to seek an attorney and develop a relationship with a Realtor you
feel comfortable with in making one of the most important decisions of
your life: purchasing your home. Then, when you have asked the above
question, you will know you can trust and rely on the answer you are given.
0 votes Thank Flag Link Tue Aug 16, 2011
You will only owe the lenders money on the "difference" or Deficiency Balance as it's called, if the loans You have on the the property have recourse. If they are non-recourse, then You won't owe anything. Talk to a Real Estate Attorney in WA to figure that out first.

2nd, and of equal importance, is Tax Liability. If they cannot pursue You for the deficiency balance on the loan(s) You have, then the Lender has only one choice... Forgive the debt. This generates a Taxable event, which is called "Debt Forgiveness Income". There is an exclusion in the Mortgage Debt Relief Act of 2007, but not everyone applies. If You don't, then You will owe taxes on the "difference" as if You made that money as income! Is that crazy or what??? See a local CPA about this to see if You qualify for any of the exclusions.

If You don't fit in any of the exclusions and You have recourse mortgages, there is ONE way You can get out of ALL that liability. Chapter 7 bankruptcy. You will not owe ANY taxes or anything on the "difference" if You file Bankruptcy before You Short Sale or Foreclose. It's a Huge financial tool in this case.

The Short Sale won't hurt Your credit, but the mortgage late-payments that accumulate on Your Credit Report sure will. That's where the damage is done.

Mr Credit
0 votes Thank Flag Link Tue Aug 16, 2011
We will negotiate with your bank to try to get you off the hook for the deficiency. Your credit will be affected - the impact may vary. Typically, your credit score can drop up to 125 - 150 points, and you will likely not be able to take out a new mortgage for two years. Feel free to call with any questions.

Eli Givoni, Director
Short Sale Department, LLC
Serving all 50 states

MARS Disclosure for General Commercial Communications
Short Sale Department, LLC is not associated with the government, and our service is not approved by the government or your lender. Even if you accept this offer and use our service, your lender may not agree to change your loan. If you stop paying your mortgage, you could lose your home and damage your credit.
0 votes Thank Flag Link Tue Aug 16, 2011
A short sale has a negative effect on your credit rating. Generally, real estate loans are secured by the respective lenders granting them rights including foreclosure.
0 votes Thank Flag Link Tue Aug 16, 2011

The short answer is, it depends. You should consult with a lawyer and tell them that you would like to negotiate the terms of the short sale to include the provision that they will not come after you for the ballance of your loan.

Good luck.
0 votes Thank Flag Link Tue Aug 16, 2011
"Nobody can take away your second home."

This is not quite accurate either. Craig mentioned earlier that they could not take a 2nd home until they get a judgment. If the second home becomes the primary home, then homestead protections would come into play also.

Again, something to discuss with a real estate attorney.
0 votes Thank Flag Link Tue Aug 16, 2011
You have some good answers below & bottom line about whether you will have to pay the difference or not will not be determined until the short sale is done. Nobody can take away your second home. A short sale on your credit report is not such a bad thing. It shows up as paid in full, maybe at a reduced amount. Your credit can be completely restored within 1 year for sure. I work with a company that does that. If you, on the other hand, have a foreclosure, that will be on for a very long time. In addition, if you go to buy another house down the road, one of the question you have to answer on a loan application is whether you have ever had a foreclosure & you would have to answer yes. This is the kiss of death as far as a bank is concerned. I know because I am a loan officer as well as a real estate broker.

If you go to my blog at http://kenmorehomesforsale.com/ , you will see at least 40 blogs about short sales that I have done that you may be interested in reading.

I would suggest that as a seller, you Google every agent that responds to your question here on Trulia, learn as much as you can about who they are online, read their client testimonials, so you know what their clients are saying about them, and then give us each a call and just ask us why we think you should work with us instead of another agent. This will take you a little while to do, but will be time well spent, as choosing the right agent is the first step towards getting your home sold. Then, pick the best fit for you and let them go to work for you with the skill and knowledge that they have. I hope to hear from you soon.
0 votes Thank Flag Link Tue Aug 16, 2011
Not to our clients. That's why you want to sell your home in a short sale and this is why you need a Realtor who has experience and know how to negotiate with banks.

Why your Bank gets Financial Benefits by Forgiving you?
Simple. It is Expensive for the lender to foreclosure a home. Some of the lender’s costs could include Legal fees, Insurance, Taxes, Eviction cost, Selling cost, etc. Their business is Loaning Not, Owning!

+ We are Short Sale Realtors CDPE (Certified Distressed Property Expert) and SFR (Short Sales and Foreclosure Resource) certified.
+ We have a success rate of 98% on approvals from the banks and have closed Short Sales in as early as 4 weeks.
+ We provide necessary paperwork, be Responsible for all contact with lenders and banks, and Negotiate on behalf of you.
+ All of our Professional Short Sale Services are FREE for you. You do NOT pay us a penny. Your banks will pay all the fees of the real estate sales including closing costs and our real estate commission Only when your home completes a Successful Short Sale.

Learn more about our Short Sale Team @ http://www.shortsalehomeexpert.com/about.html
0 votes Thank Flag Link Tue Aug 16, 2011
Hey Kary--I do a lot of short sales and if you would rather not do them, I'm happy to take referrals
0 votes Thank Flag Link Tue Aug 16, 2011
0 votes Thank Flag Link Tue Aug 16, 2011
The answer to that question starts with a question: do you have a hardship?
The simple fact that you owe more money on your home doesn't mean you are forgiven any debt if you can't demonstrate a hardship.
If you can afford to make mortgage payments, or have other assets that can be used to pay the deficiency, you will probably have to pay off the loans or work out some sort of payment plan.
Washington is a non-recourse State, meaning that the primary mortgage on your primary residence is typically protected from creditors if you are in a distressed situation; second mortgages or Equity Lines are not.
A short sale is not necessarily the best route to take. I'll add to the overwhelming number of agents who will council you to talk to an attorney, but I'll add a bankruptcy specialist. And this is not that you want to declare bankruptcy (which affects your credit for only 2-4 years as opposed to 5-7 years for a foreclosure) but because they KNOW how to use the law to determine the best strategy for you to take.
Web Reference: http://www.nwhome.us
0 votes Thank Flag Link Tue Aug 16, 2011
There is no way any one of us can accurately answer this question for you until the time comes when we have an offer & negotiations are taking place with the bank. Period end of story. I would be happy to give you more detailed answers to this and any other questions. Feel free to contact me anytime.
0 votes Thank Flag Link Tue Aug 16, 2011
If you have defaulted on your mortgage loan and can no longer afford to make your payments, you could still owe money if your house goes into foreclosure. Most homeowners believe once the lender has foreclosed on the property, it absolves them of any further financial obligation. Often, this is not the case, with the homeowner still being pursued by the lender for the deficiency amount, which can total several thousands of dollars

Check with a Real Estate attorney or your CPA.
Web Reference: http://www.BettyKerr.com
0 votes Thank Flag Link Tue Aug 16, 2011
Search Advice
Ask our community a question
Email me when…

Learn more

Copyright © 2015 Trulia, Inc. All rights reserved.   |  
Have a question? Visit our Help Center to find the answer