Foreclosures in a bad economy can present a whole new problem for homeowners. It's bad enough that you're going through tough financial times, can't make your mortgage payments, and you're faced with losing your home. Another issue is that you've signed a contractual agreement with your lender to repay the entire amount of your loan. If your lender can't recoup that investment by selling your property after foreclosure, it might be able to sue you for the balance.
A deficiency is the difference between your mortgage balance and your home's value. For example, if your mortgage is $225,000, and if your your home was worth $200,000 when your lender foreclosed, you've got a $25,000 deficiency and, in many cases, you're still responsible for paying that even though your home is gone. Your lender must enforce its right to collect from you, however. This involves going to court and suing you to get a deficiency judgment. After your lender has the judgment, it can use it to garnish your pay or your bank accounts, or even to place a lien against your other assets.
Determining the Deficiency
The exact method of determining the amount of your deficiency can vary from state to state, but it usually rests on its value at the time of foreclosure. For example, in Florida, a deficiency is usually the difference between your mortgage balance and what your property was worth as of that date – not necessarily what your lender resells it for. In New York, if your house sells for less than its appraised value, you're only responsible for the difference between its actual worth and what you owe. If it sold for less, that's the lender's problem, not yours. It's the same in Idaho – the most you can owe is the difference between your mortgage and the property's value, regardless of whether your lender sells it for less.
State laws also differ with respect to whether your lender can even get a deficiency judgment in the first place – you may be safe because of where you live. A majority of states do allow such lawsuits, including Texas, Florida, New York and Idaho. However, a few – such as California – do not, at least for original first mortgages. You may be vulnerable if you refinanced.
Your lender may be able to wait some time before suing you and even longer to collect on the judgment, depending on where you live. It can wait until you're back on your feet again and you acquire another asset that it can seize to satisfy your debt. In Florida, a lender can wait five years. In New York, however, the deadline is 90 days. After your lender has a judgment, it can wait up to 20 years in some states to use it. The key is to fight the judgment in the first place. In any lawsuit, you have the right to respond and state your case, although you might need a lawyer's help to disprove some or all of the lender's claim.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.