Remaining Loan Balance?

[Donna S.]

My friend is getting a divorce and is underwater with her mortgage. Refi'd last year for 100,000., the house appraised for 110,000. Said house would possible sell now for about 85,000. Neither party can afford the payments alone. An experienced REI in my area suggested to her that he could negotiate a short sale and buy her out of it since the short sale will only effect her credit for 2 yrs but the FCL will last 10 yrs. What happens to the remaining loan balance? Will the homeowners still be responsible for paying it back? Thanks

[Scott Hubbard]

1. Have your friend put a contingency in the sales contract that the buyer must get the lender to waive its rights to file a deficiency judgment against seller. The sale cannot close unless the waiver is received.

2. The remaining balance will be written-off (if lender waives its rights, or does not have deficiency rights) and a 1099 will be sent to the borrowers. If it is a primary residence, then there will be no tax-implications (see mortgage debt relief act of 2007).

Usually short sale are a better choice than foreclosure, but this is not always the case.

I recommend seeking counsel in your area as laws vary. There are many sources for free advice in local communities.

Good Luck.