Will I Still Owe Money After a Short Sale? “Will There be a Deficiency Judgment”?

One of the most common and most stressful questions homeowners ask is:

“If I do a short sale, will I still owe the bank money?”

The answer is: It depends - but in many cases, NO!

Let’s break this down in plain English.

What Is Deficiency?

A deficiency is the difference between:

• What you owe on the mortgage

  and

• What the lender receives from the short sale

Example:

• Loan balance: $350,000

• Short sale price: $300,000

• Deficiency: $50,000

The key question becomes:Does the lender forgive that $50,000 - or can they come after you for it later?

The Good News: Many Deficiencies Are Waived

In today’s market, most short sale approvals include a deficiency waiver, especially when:

• Your CSSE agent knows how to negotiate it correctly

• The property is owner-occupied

• The hardship is legitimate

• The loan is FHA, VA, or government-backed

• The lender wants to avoid further loss or legal expense

Many lenders prefer a clean exit rather than chasing a homeowner who is already struggling.

How Loan Type Affects Deficiency

FHA Loans

• HUD generally prohibits lenders from pursuing deficiencies

• Most FHA short sales include full forgiveness

• This is one of the biggest advantages of FHA short sales

VA Loans

• VA often pays part of the lender’s loss

• The borrower may not owe the lender directly

• However, VA may reduce future entitlement (we explain this in another article)

Conventional Loans (Fannie Mae / Freddie Mac)

• Many include deficiency waivers

• Especially for primary residences

• Approval letters must be reviewed carefully

• May need to be negotiated

Private / Portfolio Loans

• Rules vary widely

• Some waive deficiencies

• Some reserve the right to pursue

• Skilled negotiation and legal guidance are critical here

State Laws Matter - A LOT

Deficiency rules are heavily influenced by state law.

Some states are:

• Non-recourse states (deficiencies often prohibited)

• Anti-deficiency states (extra protections)

• Others allow lenders to pursue deficiencies unless waived

This is why it’s critical to:

• Review the approval letter carefully

• Consult a real estate attorney if needed

• Never assume forgiveness unless it’s in writing

Why the Approval Letter Is Everything

The short sale approval letter tells the real story.

You are looking for language like:

• “The deficiency is waived”

• “The loan will be satisfied in full”

• “The lender will not pursue further collection”

If that language is missing or unclear, it must be clarified before closing.

Never close a short sale without understanding this section.

What About Taxes on Forgiven Debt?

Sometimes forgiven debt can be treated as taxable income.

However:

• Federal law has provided relief in many cases

• Primary residences often qualify for exclusions

• State tax rules vary

This is why CSSE agents always recommend speaking with a CPA or tax professional.

Final Thought

A short sale is designed to help you move forward - not trap you with new debt.

In many cases:

• The deficiency is waived

• The chapter is closed

• You can rebuild and move on

But never guess. Never assume. Always get it in writing!