Did you know that even after your home is sold at auction or by the lender you could still be on the hook for money owed on your loan? This debt is called a deficiency, and it occurs if the amount you owed the lender is more than the foreclosure sale price.
What will the lender do to collect the deficiency? It will depend on the state, but in some states the lender is allowed to seek a judgment against the debtor and try to collect the deficiency. Unfortunately, given the real estate market in many states and lenders increased actions to collect deficiency judgments more and more homeowners are facing this problem.
How do you know if the lender will pursue the deficiency? According to experts, whether the lender will pursue deficiency judgments depends on many factors including the amount owed, whether there is a second mortgage, and where the debtor lives.
How long does the lender have to file a deficiency judgment?
Most states allow lenders to seek judgments to recover deficiencies. If you live in a nonjudicial foreclosure state, the lender generally cannot recover a deficiency without bringing a separate lawsuit.
If you live in a judicial foreclosure state, however, generally the lender can seek a deficiency judgment as part of the underlying foreclosure lawsuit. Some states also do not allow lenders to seek deficiency judgments at all if the debt is for a primary residence. Talk to a lawyer if you have questions about your state’s laws and what actions the creditor will have to take to collect a deficiency.
Statute of limitations to collect a deficiency
States which allow lenders to sue to collect deficiencies will also have a statute of limitations in which the action must be filed. For example, as of July 1, 2013, in the state of Florida, lenders must seek a deficiency judgment within one year from the date the county clerk issued a certificate of title for the new homeowner. This time limit has been reduced from Florida’s previous statute of limitations which was five years.
In Texas if it was a nonjudicial foreclosure the lender will have up to two years after the foreclosure date to file a lawsuit to collect the deficiency judgment. As you can see, it is important to understand your state’s laws and what the lender can and cannot do to collect the deficiency.
Deficiency judgment after a Short Sale
What happens if you agree to sell your home for less than the total debt balance remaining on the mortgage through a short sale? Although this may allow you to avoid foreclosure and let the lender agree to release the lien on the property, it does not necessarily mean that the lender will not seek a deficiency judgment.
Before agreeing to a short sale make sure the lender waives their right to seek payment for the deficiency. Remember, if the short sale agreement does not contain this waiver, and judgments are allowed in the state following a short sale, the lender may be able to file a lawsuit to obtain a deficiency judgment.
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