It can, but not always, and you have more control in a short sale than in a foreclosure. A deficiency is the gap between what you owe and what the home brings. Get any waiver in writing before you close.
It can, but not always, and you have more control in a short sale than in a foreclosure. A deficiency is the gap between what you owe and what the home brings. Whether the lender can collect it depends on how the case ends.
What a deficiency is
Say you owe $320,000 and the home sells for $270,000. The lender is short $50,000, plus fees. That shortfall is the deficiency. This example is illustrative.
In a short sale
The approval letter should say what happens to the shortfall. There are three possibilities:
Waived. The lender forgives the balance. This is what you want, in writing.
Settled. You agree to pay part of it.
Preserved. The lender keeps the right to pursue the balance.
Read the letter before you close. If it does not say the deficiency is waived, do not assume it is. Have a Florida attorney review it.
In a foreclosure
In some cases the lender can ask the court for a deficiency judgment. Time limits apply, and a judgment can lead to collection efforts. An attorney can tell you what applies to your case.
Taxes
Forgiven debt can sometimes count as taxable income. Ask a CPA whether an exclusion applies to you under current law.
What to do
Get the lender’s approval or settlement terms in writing.
Have a Florida attorney review any waiver or release.
Keep copies of everything.
I have closed 400+ short sales with deficiency waivers secured. The waiver has to be in writing before you close.
What to do this week
Send me your lender’s name and your payoff, and I will tell you what to ask for in the approval.
General education, not legal, tax or investment advice. Discuss your circumstances with a licensed Florida attorney or tax professional. Yoganand Ganeshram PA, licensed Florida real estate agent with eXp Realty. Equal Housing Opportunity.
Florida limitation: For owner-occupied residential property, section 702.06 limits the deficiency by reference to fair market value on the sale date, not simply the auction bid. The $50,000 illustration above describes an arithmetic shortfall, not a determination of the collectible legal deficiency.
Source: Florida Statutes section 702.06.
Originally published on Equity Edge Orlando. Reviewed for this Substack edition.