Do the homeowners still owe the bank money after a real estate foreclosure? That is a good question. When you negotiate a successful short sale, keep in mind that the agreed upon price is payment in full.
However, the homeowners may still owe the difference between the mortgage balance and the discounted amount as a result a "deficiency judgment." If granted, this judgment will affect the homeowners and their credit report just as any other judgment. You must get the bank to accept "payment in full without pursuit of any deficiency judgment." You need to explain to them 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 extreme duress and probably haven't made much income, a 1099 may not adversely affect them. They can speak with an accountant for advice.
What is a 1099?
The 1099 is given to the homeowners as a result of income they've received. For example, if the bank is owed $100,000 and agrees to accept $65,000 on a short sale, they actually made $35,000 (the short sale amount) and can receive a 1099 for that amount.
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 might affect them.
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