A Deficiency Judgment? Yikes!!

By Karen Lawson
Mortgage Credit Problems Columnist

Your home is worth less than the mortgage amount(s) against it, you cannot make your mortgage payments, and your lender has started foreclosure. What will happen once your lender completes foreclosure?  Foreclosure law varies by state, but in states where foreclosure is a judicial (court-based) legal process (all except 2), your lender may request a deficiency judgment if, after foreclosing on and reselling your home, it doesn’t realize enough proceeds to offset losses associated with foreclosure.

Don't Panic: Take Action Before Foreclosure is Completed!

Generally speaking, a lender is going to lose money on a home foreclosure. Whether it decides to pursue a deficiency judgment against you depends on several factors:

• The laws in your state must allow deficiency judgments. Only California and Oregon don't allow them as of this writing.
• The lender believes it has a realistic prospect of collecting all or part of the deficiency judgment.
• The cause of your mortgage foreclosure was not beyond your control. Typically, lenders are more inclined to pursue judgments against real estate speculators and investor owners than occupying homeowners.

If you don't want to risk facing a deficiency judgment, you can take steps to stop foreclosure before the foreclosure sale (Trustee's sale or Sheriff's sale) is scheduled. Ask your lender to consider accepting a short sale. If they agree, you can list your home for sale at market value prior to the foreclosure sale. If a fair market value offer is received, your lender would accept the sale proceeds as full satisfaction of your mortgage. This avoids the possibility of a deficiency judgment, but there may be income tax implications associated with a short sale. Contact a tax advisor for details.

Your Lender Can Help You Stop Foreclosure

This may sound odd, as your lender started foreclosure, but foreclosure is a losing proposition for mortgage lenders. If you're having a temporary hardship, and know exactly when you'll be able to resume making payments, your lender may agree to a period of forbearance, and then work with you to create a repayment plan. If your mortgage terms are changing, your lender may agree to modify the terms of your loan to bring your interest rate(s) and payment amount(s) to affordable levels.

If you can't repay what you owe, and must let your home go, a short sale or deed in lieu of foreclosure is preferable to having a foreclosure against your credit record. A deed in lieu is a transaction in which you voluntarily deed your home to the lender, which saves the cost of foreclosure and helps you avoid foreclosure and its negative impact on your credit score.

About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.

Share This Article:

Other Recommended Debt Consolidation Articles

• Debt Relief Desperation
• Three Paths To Debt Relief
• Debt Consolidation: Is a Debt Consolidation Loan Right for you?