Full Waiver of Deficiency: Why It’s Important
Negotiating and selling an underwater home via short sale is not something a homeowner should do alone. Having a seasoned real estate agent and short sale attorney to work with is a must for the most successful and beneficial outcome for the homeowner.
A key element to this success is the status of the deficiency.
During the process, the difference in the amount from the sale and the amount owed is referred to as the deficiency. During the negotiation, if approved, there are specific terms with which the approval is contingent upon. These terms are specified in the bank’s approval letter to the homeowner. There is a minimum sale value that will be accepted by the lender; any money over this amount in the sale contract goes directly to the bank to satisfy what was borrowed. A good negotiator works with the lender to ensure that this value is reasonable given the underwater status of the home.
The complexity of this area in the short sale process is one of the many reasons why a homeowner wants to make sure the firm who is negotiating their deal has experience, professionalism and success with past clients. Getting the full deficiency waived and the loan settled in full is crucial. Once the bank approval letter includes that the balance will be settled in full with a full waiver of deficiency, the lender can no longer come after the homeowner for the deficient amount, even after the sale of the home goes through.
Prior to the Mortgage Debt Forgiveness Act, another area of importance that had homeowners shying away from short sales was the potential taxes they may owe on the amount they were deficient. In some cases, the forgiven amount could be considered taxable income and the homeowner may have to pay taxes on that amount. However, the act has been extended through the year 2016 and protects homeowners from having to pay this tax when they have completed a short sale or foreclosure during that year. The act is readdressed each year and has been extended by the government since it was originally approved in 2007.