Foreclosure or Short Sale May Not Be the End
As lenders try to minimize losses in today’s real estate climate, they’re trying to grab every income stream they can. For example, if you’re doing the right thing and trying to sell your home through a short sale, or pursuing a deed in lieu…or even if your home is foreclosed upon, they may still come after you for the debt you owe!
Simply going through a foreclosure or the credit damage of a short sale or deed in lieu may not be the end of your struggle. If your home doesn’t sell for enough to cover the amount you owe, your lender could try to collect that amount in what’s known as a deficiency judgment.
Deficiency Judgment Example
For example, say you owe $200,000 on your home and your lender agrees to let you sell it for $175,000.
That means you have a $25,000 deficiency.
- Image via Wikipedia
Depending on the state you live in, your lender could slap you with a legal judgment that requires you to repay that $25,000!
That’s right…after struggling with you payments and the bank for months and finally getting them to agree to the sale, you’re not done! You still owe them the $25,000…which means they really didn’t lose anything on the home expect a few months’ payments if you were behind.
How ludicrous is that?!
They take months to approve your sale, kill your credit, and don’t really lose anything…almost unbelievable.
Most often, when a lender has a judgment placed against you, it is in the form of a promissory note. The terms of these notes vary, but they often have no or little interest and can have no required payments for years.
What Can You Do?
How can you protect yourself?
There’s really only one way…negotiation.
When your lender agrees to the short sale or deed in lieu, they will send you a contract to complete the transaction with you. Read that contract carefully! Make sure you understand every word. If you don’t understand it, take it to your real estate agent, lawyer, or mortgage broker and ask them what it means. You can also take it to a HUD Housing Counselor.
Almost everything is negotiable! If you see conditions you don’t like…try to negotiate them out of the final contract. Most lenders use broiler plate documents and expect homeowners to just accept them. Lenders know you feel like your back is against the wall…but you still have rights!
Another way out of the deficiency judgment is to file bankruptcy after the foreclosure or workout is final. The judgment can be wiped out in a bankruptcy because it’s unsecured debt.
For More Information
See this Puget Sound Business Journal article: B o fA wording may cause more foreclosures
Listen to the ‘Streamline Refinancing’ call I did with Brent Lane in January
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Tags: bankruptcy, deficiency judgments, lender negotiation, loss mitigation, state laws
July 2nd, 2009 at 9:54 am
We had been told that lenders were going after the borrowers for the deficiency. In California, a more exact example would be, a note balance of 400k, yet it appraises for 175!!!! More than half— attorneys will never be out of work!!
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