Real Estate Definition: What Does It Mean When You Waive a Deficiency on a Mortgage?

by
Richard Fonfrias, J.D.
Chicago’s Financial Rescue & Bankruptcy Lawyer
Fonfrias Law Group, LLC

If you think your mortgage lender might foreclose on your home, consider a short sale to avoid a foreclosure. And if you go the short sale route, make sure you get a “waiver of deficiency” from the lender so the lender does not come after you for any amount not covered by the short sale.

What is a Short Sale?
In a short sale, you sell your home for less than the balance due on your mortgage. The difference between the amount of the sale and the amount you owe is called the deficiency. The lender would like to sue you and hold you liable so you pay the lender this difference. In this way, the lender would not lose money on the short sale.

To avoid being held liable to the lender, you must get a letter from the lender stating that the lender waives the deficiency. This means that the lender will not hold you liable for any deficiency that remains after the short sale. Don’t take any person’s word for the fact that the lender will not sue you. Make sure you get the waiver of deficiency in writing. And make sure your lawyer is satisfied that the language in the letter relieves you of liability.

Other Documents Do Not Qualify
Lien releases and other documents do NOT release you from liability for the deficiency. If you have other mortgages, such as a home-equity line of credit, you will also need a letter from that lender waiving any deficiency. And please note: Lenders have no legal obligation to waive a deficiency.

Here’s how you can protect yourself: Hire an attorney to draft a contract that says all lenders must waive deficiencies and agree to all other terms pertaining to the short sale. Then if your lenders fail to approve the short sale prices and terms, then you or the buyer can stop the deal if the lenders don’t agree. This is another reason to make sure you hire a qualified lawyer to represent you in this transaction.

You Might Owe Taxes
If the lender waives the deficiency, then you won’t owe the lender any money. But you still might owe the government taxes on the amount that was waived. Still, you may not have to pay taxes thanks to the Mortgage Forgiveness Debt Relief Act of 2007, which lets you disregard income from a deficiency waiver on your main residence from 2007 through 2012. But unless Congress takes action, your waived deficiency will be subject to federal tax.

If The Lender Won’t Give You a Waiver
…then you might get the lender to agree to a smaller settlement than the total amount of the deficiency. Or, if the lender won’t cooperate, it might sue you for the total deficiency.

The good news is most lenders will work with you to reach some type of arrangement because lenders usually don’t want to go to court.

For more information about short sales in Illinois or any other legal /financial topic, please call Richard Fonfrias, Chicago’s Money Lawyer at 312-969-0730 or email him at richprivatemail@protonmail.com. A respected Illinois BK lawyer, Richard Fonfrias has extensive experience serving clients in financial distress. Founder and managing partner of the Fonfrias Law Group, Rich specializing in bankruptcy law, foreclosure help, business law, and many financial and tax services. Whether you are worried about losing your home to foreclosure, have serious debt problems, or you are having problems with the IRS, you are always welcome to call Rich to discuss your situation in confidence. With many years of experience assisting people with serious money problems in Illinois, Rich is a Chicago lawyer you can trust.