owner owing difference?

[Mathew Wray]

I'm curious about something I've heard repeated a few times. When a short sale goes to closing is the owner expected to come up with the difference between the sale price and the mortgage price? I've been told that one of the difficulties in dealing with short sales is that often the sellers don't know, or don't want to know, that they have to pony up the difference in the sale price and the mortgage price so when they find that out at closing they often end up walking away and just letting their property get foreclosed on.

Is this common or just a risk or am I way off base?

Thanks!

Mathew

[Jon Holdman]

No. If the owner can cover the shortage its not a short sale. In a short sale, the bank agrees to accept less than they're owed.

Now, there are other consequences. Forgiven debt is taxable income, as far as the IRS is concerned. However, for now, there are special programs in place that for owner occupants who have only acquisition or improvement debt, this can also be forgiven. OTOH, if they did cash out refi's and bought toys and went on vacation, they may have a tax bill. And investors are usually looking at a tax bill.