Do the homeowners still owe the bank money after a real estate foreclosure? That is up to the bank.  When you negotiate a successful short sale, keep in mind that the agreed upon price is payment in full so the title is clear for you to close.

However, the homeowners may still owe the difference between the mortgage balance and the discounted amount.  This is called a "deficiency judgment."  If granted by the court, this judgment will affect the homeowners and their credit report just as any other judgment.

You can ask the bank to accept "payment in full without pursuit of any deficiency judgment." But the bank does not have to grant your request.  Most of the time the banks will not pursue the deficiency judgment, they will just 1099 the homeowner. You need to explain to the homeowners that the discounted amount (the difference between the mortgage balance and the short sale) may be declared as income on their income tax return by means of a "1099."

Since the homeowners have been under such financial duress they probably haven't made much income, a 1099 may not adversely affect them. The homeowners can contact a local tax advisor for more details.  Make sure you provide information to the homeowners (Preferably in form of disclosures for you or your company) but do not give any legal or tax advice.

What is a 1099?

1099 forms are used for a number of reasons, though, typically, they are given to independent contractors--also known as "freelancers"--as a record of the income they received from a particular business.  So in essences the 1099 are reported as income you received from the bank.  You must explain this to your homeowners when discussing a short sale and advise them to speak with an accountant as to how a 1099 will affect them.

Typically, the homeowners are showing no income or have had limited income for quite some time because of the financial hardship they are facing. If this is the case, a 1099 will not affect them.

When we explain the results of the foreclosure sale and the 1099 to the homeowners, they never seem to care. They just want us to stop the foreclosure.

Deficiency judgment

Deficiency judgment is a judgment against a borrower in favor of the lender in an amount equal to the difference between the funds received from a court sale or short sale of a property and the balance remaining on a mortgage or other loan. The bank can seek a deficiency judgment for the shortage on the actual amount received versus the amount that was due.

Likewise, the same judgment can be sought when the property sells at the courthouse for less than what is owed or after the REO department sells the property for less than the full amount.

If the bank does pursue a deficiency judgment, the homeowners may have to file bankruptcy at a later date to remove the judgment. Another option is to short sale the judgment amount at a later date.

It's important for you to know that the lender cannot pursue a deficiency judgment and issue a 1099. They can only do one or the other, not both. If the deficiency is waived as a condition to the short sale, the homeowners will receive a 1099.

If the judgment is not waived, we leave the decision up to the homeowners as to whether to pursue the short sale or not.

It is important to remember as stated earlier, if there is no equity and the property goes to the sheriff's sale, and the bank receives less than what was owed, the bank can still pursue the judgment or issue the 1099.

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