Final answer:
The most likely consequence of a short sale is that the forgiven mortgage deficiency may be treated as taxable income. It is less common for the deficiency to be added to a future sales price or for the homeowner to be sued, as these outcomes are not typical of a short sale agreement.
Step-by-step explanation:
Consequences of a Short Sale
When considering the most likely consequence of a short sale, the answer depends on the specific financial and legal circumstances involved. A short sale occurs when a property is sold for less than the amount owed on the mortgage, and the following are potential outcomes:
- The client may need to make arrangements to pay off mortgage deficiency.
- The forgiven mortgage deficiency may be treated as taxable income.
- The mortgage deficiency may be added to the future sales price of the home.
- The mortgage company may sue the homeowner for the deficiency amount owed.
A common outcome is that the forgiven amount, otherwise known as the deficiency balance, could be treated as taxable income, although this can vary based on the Mortgage Forgiveness Debt Relief Act and depending on current tax laws. It is less common for a mortgage deficiency to be added to the future sales price of a home, as the deficiency generally relates to the prior mortgage agreement that is being resolved through the short sale. The homeowner may indeed be sued for the deficiency amount, but this is less likely as the lender typically agrees not to pursue a deficiency judgment as a condition of approving the short sale.
Historically, following the mortgage crisis that began in 2007, many homeowners faced a situation where their property values had plummeted, and they owed more than the worth of their homes. They were left with negative equity, which often led to the consideration of a short sale. In the wake of the crisis, short sales became a tool for homeowners to avoid foreclosure while allowing banks to mitigate their losses.