Short Sales: What is a deficiency in a short sale?

A deficiency in a short sale is the difference between the net sale proceeds of the house and the outstanding loan balance owed on the house.  As an example:

Net home sale proceeds	$200,000.00
1st deed of trust balance owed at time of sale	($240,000.00)
Seller’s deficiency	($40,000.00)

In a short sale, when the seller’s bank chooses to release its deed of trust, it may either (1) demand that the seller personally cover the deficiency (and the seller will still be responsible to pay back the deficiency), or (2) may agree with the seller that the bank will not pursue the seller for a balance owed on the deficiency.  Therefore, in the example, if the seller does not want to be on the hook for the $40,000.00 deficiency then he must obtain the bank’s written agreement that he will be released from owing the deficiency.  The seller should seek professional advice to verify that the agreement is binding on the bank and make sure that his interests are protected.