A deficiency judgment is a court judgement that is issued when a borrower takes out a loan and is unable to pay the full amount that is owed at the time of sale. By way of example, let’s say a borrower buys a home for $500,000 and takes out a loan (mortgage) for $400,000.
Borrower neglects to pay the principal of her loan and falls behind on her monthly mortgage payments, owing the full $400,000 on the loan. The property is sold for $350,000. The lender can obtain a deficiency judgment for the remaining $50,000.
If a borrower falls behind on her mortgage, the lender can legally foreclose on the property to recover the balance of the loan. In order to foreclose on a home, the lender must first prove that the borrower is in default.
After the lender contacts the borrower and attempts to resolve the default with the homeowner, the lender files a lawsuit with the court against the borrower to obtain legal authority to foreclose on the property.
If the amount owed on the loan is more than the sales proceeds from the sale via foreclosure, and your lender obtains a deficiency judgment against you, you become personally liable for the judgment amount. In that regard, you become legally obligated to pay your lender. Mortgage lenders can collect deficiency judgments in any of the following ways.
- Getting liens on any other properties in your name: A lender can place a lien any of your assets, including other real estate properties that you own, if any.
- Garnishing your wages: Lenders can take a portion of your paycheck for as long as it takes in order for the debt to be repaid in full.
- Levy your accounts: Lenders can take cash for your personal bank accounts in order to satisfy the debt.
Depending on the specific rules in your state, the lender can also freeze your bank account until some amount of the deficiency is satisfied.
Different states have different laws, so whether your lender can sue you for the deficiency depends largely on the state where you reside. For example, there are some states that are judicial foreclosure states, which require foreclosures be completed through the court. There are also some states which are nonjudicial foreclosure states, where foreclosures do not need to be completed through the court. Some states only allow the lender to sue for deficiency judgments if the state permits judicial foreclosures, but not for nonjudicial foreclosures.
Notwithstanding, some states do not allow deficiency lawsuits if the house that was secured by a mortgage was the borrower’s primary residence. Other states put a cap on the amount a lender can recover in a deficiency judgment.
Finally, some states do not allow deficiency judgments if the borrower holds more than one mortgage and the foreclosure occurs on the first mortgage. For example, the borrower buys a property for $500,000, receives a first loan for $350,000, then takes out a second loan for $50,000. If the first lender forecloses and recovers the $350,000, but there is nothing left to pay off the second loan of $50,000. Some states do not allow the second lender to obtain a deficiency judgment.
If your lender has already obtained a deficiency and you are unable to pay it, speak with your lender. If you explain your situation and the lender understands going after you for the deficiency is futile, the lender may forgive the debt. You also may be able to work out a repayment plan with you. Nevertheless, some lenders are unwilling to negotiate. In that case, you may consider filing for bankruptcy.
If you will be involved in a deficiency judgment, you will likely need to contact a real estate 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.