Hard Facts About Deficiency Judgments

A deficiency is the amount of money that is still owed to a lender after a home has been foreclosed or sold in a real estate short sale. For instance, if a home is sold for $90,000 and the borrower had an outstanding loan balance of $110,000, the deficiency on the loan would be $20,000.

Often, after a foreclosure or a real estate short sale, a borrower will be surprised to receive a notice requiring them to pay the deficiency, or at least some part of it. Many home owners do not realize that they can be help personally liable for the deficiency balance of the loan when the short sale or foreclosure are complete.

This problem could be avoided in more homeowners contacted qualified real estate attorneys to go over their real estate forms and other legal documents with them before they entered into these contracts.

It is important to note that not all loans are subject to a deficiency judgment. Most first mortgages are no-recourse loans which means that after a foreclosure or short sale, the borrower is not personally liable for the balance of the loan. Conversely most second mortgages and many refinance loans are recourse loans that leave the borrower personally obligated to repay the deficiency amount in the event of a real estate short sale or foreclosure.

A recourse loan includes a promissory notice, which is a promise on the part of the borrower to repay the debt in full. It is this promissory note, not the loan itself on which a deficiency judgment is placed. This confuses many people because the lender might have approved a short sale and accepted a partial payment. But the lender still has the option of obtaining a deficiency judgment against the borrower for the  remaining unpaid amount of the loan.

One thing to remember if you find yourself in this position is that most often, the company exercising the promissory note and attempting to collect on it is not the original lender. When the short sale or foreclosure is over, many lenders sell the  promissory not to a debt collection agency for pennies on the dollar.

You may be able to negotiate a much lower pay off with this third party company, simply because they paid nowhere near the amount of the deficiency for the note. They may accept a much lower amount and still make a profit. It is in their best  interest to settle the note as quickly as they can and accepting a discounted payoff now may make more sense for their business model than pursuing the full amount and spending the time and effort it might take them time to collect it from the borrower.

Be sure to go over all of your real estate forms with a competent real estate attorney before entering into foreclosure or short sales so you understand what may happen and get representation during negotiations to avoid surprises later down the road.