When a homeowner is threatened with foreclosure, he will often attempt to sell the home and pay off the mortgage debt before the bank takes away the house. A foreclosure can have an extremely negative effect on the homeowner's credit and may prevent him from purchasing a new home for several years. However, if the house is worth much less than the buyer owes on the mortgage, he may not be able to cover the entire debt. If the difference between the amount you owe on the mortgage is much less than the value of the home, potential problems can arise if the bank decides to foreclose on the property.
When a borrower defaults on his loan by not making timely payments on his mortgage, the lender often has a clause in the contract that allows it to take back the property. The lender can choose between a judicial foreclosure, a foreclosure that uses the court system to foreclose the property, or a nonjudicial foreclosure, a foreclosure that does not use the court system. The property may then be sold at an auction to the highest bidder.
A deficiency exists when the amount that you owe on the debt, plus the fees associated with the foreclosure proceedings, is more than the amount that the lender receives from the sale of the property. If a lender uses a nonjudicial foreclosure, it gives up the right to collect on this deficiency. During a judicial foreclosure, a lender files a lawsuit to get the court to order the house sold. The lender can also request a deficiency judgment be placed against the borrower. Some states will not allow deficiency judgments.
A lender can pursue a deficiency judgment in several ways. The lender may turn the debt over to a collection agency or law firm. The lender may be able to garnish your wages to collect on the deficiency.
In many cases, a lender does not have to seek immediate relief for the deficiency judgment. Once the judgment is entered, the lender may have up to 20 years to collect the debt. The lender may wait until you have a better financial footing before pursuing collection on the debt.
You may want to consider an alternative to having your home foreclosed upon. The foreclosure process may be long and provide you with ample time to make other arrangements. Some states allow you to surrender your home and be immune from a deficiency judgment. You can ask your lender to approve a short sale, an agreement that allows you to sell your home for less than the debt that is owed on it. If your bank approves the short sale, make sure that you receive a release on the debt that you owe or the bank can go after you for the deficiency. A loan modification or filing bankruptcy are other options.
- Kiplinger: I Owe More Than My House Is Worth
- CNN Money: You Lost Your House - But You Still Have to Pay
- Bankrate.com: Paying a mortgage deficiency
- The Law Office of Clark Daniel Dray: I Owe More On My House Than It’s Worth – Six Tools For Dealing With An Underwater Mortgage
- California Courts: Foreclosure
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