If a homeowner is going through a foreclosure, or is in the process of attempting to “short-sale” his or her home, a lawyer can be retained to negotiate a deficiency waiver with the mortgage company or other lien holders. A deficiency waiver is an agreement, typically in writing, between the homeowner and the bank, indicating that the bank will not attempt to collect from the homeowner any balance owed.

What is a deficiency?

When there is still money owed to the lender, even after the real estate is sold, this is called the deficiency. In a short sale, the property is being sold for an amount that is “short” if the mortgage. So, there is always going to be a deficiency. The vast majority of foreclosure cases also end with the sale yielding less then the amount owed to the mortgage company. The difference between the sale price and the amount owed, is called the deficiency. It basically means that the sale was deficient in that it did not make the lender whole.

How can the deficiency be waived?

The creditor or lender would agree to waive it. There is nothing that the homeowner can do to force a waiver.

I thought that short sales meant that I wouldn’t owe any more?

The short sale means that you won’t owe, only if there is an agreement indicating that the lien holder is not going to attempt to collect from you. That agreement is called the deficiency waiver. Without the deficiency waiver, the mortgage company can pursue you and attempt to collect the deficiency. If you are engaging in a short sale for a property that has multiple liens, then you will need deficiency waivers from all of the lien holders in order to protect yourself against collection attempts.

Why would the mortgage company do this?

The mortgage company would grant a deficiency waiver if they don’t intend to collect. Some mortgage companies do not collect on deficiencies. So, they freely add deficiency waiver language when asked to do so.

The mortgage company might also waive the deficiency in order to compel the homeowner to take or refrain from taking an action. For instance, if the homeowner is contesting the foreclosure case in court, then the mortgage company may offer to waive the deficiency in exchange for a judgment, meaning that the legal battle can end between the parties and the property can proceed to auction or sale.

Is this like the “get out of jail free” card?

Not so fast. Sometimes a deficiency waiver means that the borrower never hears anything about that debt ever again. This was the case nearly all of the time that the Mortgage Forgiveness Debt Relief Act of 2007 was in effect. This Act allowed to homeowners to exclude from income any deficiency waived on a primary residence. However, now, the individual may have to include the waived deficiency as income on tax returns.

What can happen if the deficiency is not waived?

The mortgage company can pursue the debtor like any other judgment creditor can. Depending on your state collection laws, the former homeowner could suffer wage garnishment, bank account garnishment, lien attachment, etc. The mortgage company may also merely elect not to collect, in which case the former homeowner will likely receive a Form-1099 to include the debt as income for that tax year.