Recently on our bankruptcy forum a user asked, “I have owned my home for ten years. I lost my job last year and have not been able to make my mortgage payments for several months. I have just been notified that the bank is going to foreclose on my home. If the bank takes my house and sells it but the amount they get on the sale is less than my mortgage amount will I still owe them money after the sale?”
Deficiency after a foreclosure sale
What you have specifically asked about is referred to as a deficiency- the amount owed after the foreclosure and sale of a home which is above the amount recovered through the sale. The bad news is it is possible for you to go through a foreclosure, no longer own the home, but still owe the lenders money. Additionally, the lender is likely to file suit against you to recover the deficiency amount.
Let’s look at an example. Let’s say you owe $300,000 on your mortgage and you cannot afford to pay your mortgage payments each month. If the lender decides to foreclose on your home and sell your house at a public sale the home might sell for $250,000. State laws vary, but if the state allows the lender to seek payment for the deficiency, the lender may obtain a judgment against you. If allowed, you would still owe the lender $50,000.
Now, it’s important to note that a deficiency judgment is only an issue if your home is likely to sell for less than the amount owed. If you owe less than the sell price your lender is obligated to apply the sale price of your home to the mortgage debt.
Non-recourse mortgage state and foreclosure
Now, to complicate matters, state laws vary. There are certain states, which are called non-recourse states, which do not allow the lender to seek additional compensation or remedies if the sale of the home does not satisfy the mortgage debt.
In non-recourse states, if the bank or mortgage lender decides to foreclose and sell the house, they will have to be satisfied with whatever monies they receive from the sale, which often means they will have to accept a loss.
Is your state a non-recourse state?
Now that you are facing foreclosure it’s time to review your state’s statutes. You did not mention where you live so we’ll look at some general laws for several states.
For example, in Arizona, a homeowner is not liable for the deficiency if they live in a single one-family or single two-family home on a plot of less than 2 ½ acres, assuming they have resided in the home for at least 6 months.
In North Carolina the homeowner may not be liable for the deficiency after the foreclosure if the financer of the mortgage also is the same company who is selling the house. In North Dakota the homeowner may also be protected from paying the deficiency if the property has less than four units and is on a plot of less than 40 acres.
Other state laws, however, are not so forgiving, but they may offer some relief. For example, in the State of Texas, a homeowner is only liable for the difference between the loan amount and the current fair market value of the home. This may offer some relief for buyers who obtained a mortgage when the housing prices were high but cannot sell their home because the housing market has plummeted.
Some states will allow lenders to sue you for the deficiency amount after a home foreclosure. Other states will not.
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