Can a Foreclosure Short Sale Negotiate a Forgiven Deficiency?

You can negotiate forgiveness of a so-called deficiency balance when you complete a short sale of your home. A short sale allows you to sell your home for less than the balance remaining on the mortgage. Short sales are necessary when the seller must sell and the house is worth less than the mortgage. Sometimes banks allowing short sales will sue the seller for the remaining deficiency balance. However, as part of the short sale agreement banks can promise not to sue.

Upside Down

Owing more on your house than it is worth is considered "upside down." A house upside down can be impossible to sell without a short sale. In a normal housing market, few prospective buyers are likely to pay a price considerably above the appraised value, and that's exactly the help that upside down homeowners need. Sellers forced to sell while upside down on their mortgages are often feeling financial pressure from a job loss, illness or escalating mortgage payments because of interest rate changes to their adjustable mortgage.

Falling Property Values

Property values can go down as easily as they go up. A severe housing slump or deep recession can push down property values by a third or even half if the homes were purchased at an inflated price. This creates a critical situation for homeowners who may have made a minimum down payment and didn't have much equity at closing. For example, it's possible to purchase an FHA home for as little as 3.5 percent down as of 2011. That likely won't be a factor for someone planning to remain in the home for 30 years, but someone needing to sell in a year or two could find themselves upside down if property values have fallen.

Short Sale Process

A short sale is not possible without the approval and cooperation of the lender. The lender has the right to force you into foreclosure if it decides that is a better deal for the bank. It is also common for banks to conduct a thorough review of your finances before agreeing to a short sale. As a condition of the short sale the bank may force you to cash out assets, such as 401k accounts and other retirement funds and to apply that money to the transaction. The Washington Post reports that it is not uncommon for people to pay out of their own pockets to pay or decrease the remaining balance.

Avoiding A Lawsuit

CNN reports that people negotiating short sales should ask for a written guarantee that they will not be sued for any remaining balance. However, the lender is not obligated to agree. To make matters worse, a seller upside down and desperate to sell has almost no leverage. Protect yourself by taking a strong stance in the short sale negotiations. Tell the bank you will choose foreclosure rather than accept a short sale offer that does not release you of further responsibility for the balance. Allow an experienced real estate attorney to continue the rest of the negotiations. Ultimately, you and your attorney must decide what to do -- even if that means taking the short sale with the possibility of a judgment on the balance.