How Does a Short Sale Affect a Co-signer?

A short sale provides some relief from homeowners facing foreclosure.

house image by Ian Holland from

Mortgage holders on the verge of foreclosure may find some degree of relief if they can make a short sale instead. During a short sale, the lender agrees to sell the house for less than what you owe. Depending on your local laws, the balance might be forgiven or you might continue to owe the remaining balance due. A co-signer gets little say in whether to enter into a short sale agreement but gets all the liabilities and consequences.

Co-signer's Liabilities

As a co-signer, you get very little in the way of rights. You do not have property rights or a say in what happens to the house. You remain responsible for the debt owed. You take a hit on your credit report for all late payments and past due balances owed on the house.

Your Credit

Short sales typically occur after the property owner goes into default. As the co-signer, you share the negative entries on your credit report. You may have many past due entries such as 30-day lates, 60-day lates, 90-day lates and 120-day lates. FICO estimates that a 30-day late entry may result in your score being lowered in the range of 40 to 110 points. A 90-day late entry may result in your score being lowered in the range of 70 to 135 points. The actual short sale may cause your score to fall between 85 and 160 points.

Deficiency Balance

Depending on the terms of the short-sale agreement, you may get stuck with a bill. A short sale offloads the house for less than the total amount due on the mortgage note. The deficiency balance on the note must be paid depending on state law and depending on whether your mortgage holder requires it. You'll continue to be obligated to make monthly payments until this amount is paid off.


When the lender decides to offset the deficiency balance, you receive a 1099-C from them, which lists the balance they offset. You must report this debt forgiveness on your tax return. The IRS generally treats a debt offset as taxable income. The Mortgage Debt Relief Act of 2007 provides an exception when the property is a qualified principal residence. As a co-signer, however, you may not qualify for this exception. You may want to consult an accountant to find out the tax implications of the short sale.