Deficiency Judgments

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What Is A Deficiency Judgment?

A deficiency judgment is a type of legal order that is typically issued when a borrower is unable to pay the full mortgage amounts that are owed on the home or property after the property is sold. 

After the borrower has defaulted, the property may be sold in a foreclosure sale in order to satisfy the debt. However, if the proceeds from the property sale are less than the amount owed, then the mortgage lender may have to initiate a deficiency judgment to compel the borrower to make up for the difference in costs. For example, if a lender has lent a $10,000 mortgage, but the foreclosure sale only yields $9,000, the lender may bring a suit for the remaining amount. In this example, the lender would be entitled for the remaining amount, which would be $1,000. Thus, a court would issue a deficiency judgment for the amount owed.

When Is a Deficiency Judgment Available?

Typically, a lender may obtain a deficiency judgment any time after the foreclosure sale has been completed. It is also standard practice that the borrower must provide their informed consent to a deficiency judgment. Put simply, the borrower must first knowingly agree to be liable for any deficiencies in the event of a foreclosure. The agreement to be liable is usually contained within the mortgage document itself.

If the mortgage document contains a consent clause for deficiency judgment, then the mortgage is called a “recourse mortgage.” If the mortgage does not contain such a clause, then the borrower cannot be held liable for deficiencies. These second types of mortgages are called “non-recourse mortgages.”

Thus, depending on the laws of the state, the borrower must first consent to a deficiency judgment before the lender can file a claim for a deficiency judgment. 

When Is a Deficiency Judgment Not Available?

  1. Deficiency Judgment Not Permitted By State Law: Deficiency judgments may not be available in all states. These states, like California, have anti-deficiency statutes, which prohibit deficiency judgments under certain circumstances. 
  2. Foreclosure Is On First Mortgage: Some states do not allow deficiency judgments if the foreclosure occurs on the first mortgage that was used to purchase the home. Moreover, some state laws also require the lender sell the property before they are allowed to collect deficiencies from a borrower. Additionally, in most cases, a deficiency judgment will not be allowed if the lender did not inform the borrower of the property sale before attempting to collect the deficiency amounts. 
  3. Deficiencies May Be Modified To Reflect Fair Market Value: Deficiency judgments may be modified according to “fair value” statutes. If a state operates according to fair value legislation, and a house is sold, the court will determine the fair value of the property according to market values, which may be less than the actual sale of the property. In the example above, a fair value determination may reveal that the house is actually only worth $9,000 instead of $10,000. In that case, the borrower would not be liable for any deficiencies, since the foreclosure sale already yielded $9,000.

Do I Need a Lawyer for a Deficiency Judgment?

If you will be involved in a deficiency judgment, you will likely need to contact a lawyer. A lawyer will be able to determine whether a deficiency judgment is appropriate according to the real estate laws of your state. Additionally, it would be wise to consult with an attorney early on in the process, perhaps even long before you agree to sign a mortgage. Having a lawyer review the mortgage documents is one way to determine whether a deficiency judgment could be possible in the future.

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Last Modified: 05-14-2014 02:28 PM PDT

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