Legal Question in Real Estate Law in California

Whether or not the loan company can sue you for the balance after a short sale depends on two things. First, if the loan was a "purchase money" loan, they cannot pursue you for a deficiency no matter what. A purchase money loan is one placed at the time you bought the property and all the loan proceeds went into the purchase. If you refinanced or have a HELOC or used cash from the loan to pay down consumer debts to qualify for the loan when you bought the property, or any other scenario in which the loan was either not made at the time of purchase or not used entirely for the purchase, the lender has deficiency rights. So then it becomes a question of whether the lender will agree to accept the short sale payment as full payment of the debt. Since the lender will usually get more from a short sale than foreclosing and then having to carry and sell the property, most lenders will agree to accept the short sale proceeds as full payment. As you say, if they won't, why should you go through the trouble of selling the house. I have heard, however, that Wells Fargo and Bank of America are sometimes refusing to cancel the balance due as part of a short sale agreement, reserving the right to make that decision at a later date. So make sure you have in writing from the lender that they will accept the short sale as full payment. As for the Mortgage Forgiveness Act, that is a tax relief measure. When the lender writes off the balance after a short sale or foreclosure, that is taxable income to you. The Mortgage Forgiveness Act created temporary exclusions from taxation for certain qualifying mortgage forgiveness events.