If I Short Sell My House, Do I Have To Pay The Lender The Difference?



Video Summary

If I sell my house, do I have to pay the difference to my lender?  I’m going to give you a "lawyer answer" because it’s not always the same with every transaction.  It’s transaction and borrower-specific.  The usual case is that if you have a short sale, the lender usually forgives any difference between the amount that they receive from the sale of the property and what is owed.  And a lot depends also on whether it’s a first mortgage versus a second mortgage.  With second mortgage holders, some of them will not agree to forgive the difference and that can be treated a couple of ways.

Sometimes they require the borrower in the short sale to sign a promissory note for a certain amount of money.  It may not be for the full amount or they may negotiate a lump sum amount, which they will accept to forgive the difference.  With second mortgage lenders, a lot has to do with who the lender is.  There are certain banks that will not release you from liability and they will release the property from their lien; however, they will continue to hold you responsible for that amount.  Whether or not they sue you or bring a lawsuit for the difference, that remains to be seen.  Usually, if they do, the amount can be negotiated to a probably $0.10 to $0.20 on the dollar as to what you owe if you can work out a lump sum payment.

Also, you must remember that if they do forgive your loans, they can issue what they call a 1099-C, which is a report to the Internal Revenue Service that they forgiveness of debt is considered income.  If this is on your primary residence then you can probably avoid paying any taxes.  If you’re taking a loss on your rental property, then you can avoid having to pay taxes by filing the tax return and having a basis higher than what they amount that you sold the property for, so that you have a loss on the property that offsets the gain.  So whether or not they forgive the debt or not depends on your particular circumstances, particularly if you have the ability to pay. If you show a nice fat financial statement or good income, they’re more likely to order you to make a contribution at the closing as far as the unpaid balance.  So if you have any questions about that, you can give me a call at 847-2288.  Thank you.