Explaining a
April 2, 2009

Q: My house is worth less than the mortgage balance, and I am considering a “short sale”. Can you explain the process?

A: A short sale, in the real estate context, is a sale of real estate in which the proceeds of sale are insufficient to pay off the entire amount owed on the mortgage. The mortgage lender cannot be forced to accept a short sale, and must agree to release the mortgage for less than the balance due. The mortgage lender usually requires the homeowner to submit various documents justifying the short sale, such as a financial statement, tax returns, pay stubs, evidence of fair market value, etc. If the mortgage lender agrees to the short sale, there will be a deficiency owed by the homeowner after the sale. The amount of the deficiency is equal to the difference between the amount of sale proceeds received by the lender and the amount owed on the mortgage. Some mortgage lenders will agree to forgive the deficiency, but many will not, and the homeowner usually must repay the deficiency amount to the mortgage lender over a relatively short term. Generally, forgiven debt is includible in income for tax purposes. However, in most cases, the forgiven deficiency will be excluded from income under the Mortgage Forgiveness Debt Relief Act of 2007.

If you have questions, please contact:
John Wise, Esqurie

JWise@TandLLaw.com
(410) 752-2468