Facing A Deficiency Judgment After Foreclosure Or Short Sale
July 23rd, 2010
You probably already know what a deficiency judgment is. Generally, it’s a lawsuit to collect unpaid debts, and in our business, it’s a lawsuit to collect the balance due on a mortgage after a foreclosure. Not all states allow lenders to do this, but many of them do.
When you have to sell your home through foreclosure or short sale, is there any way to prevent a deficiency judgment from being awarded? What happens in those situations?
Deficiency judgments are often only avoided through negotiation with the bank before the foreclosure. In the process of getting a short sale approved, the homeowner or his agent can sometimes ask the bank waive their right to further collection efforts if the house is sold. Considering the cost of keeping an REO property and the fact that the homeowner is usually broke at that point, the bank will sometimes agree to this.
When that isn’t possible, depending on state law, the homeowner may have a deficiency judgment on their hands, whether the short sale was approved or the foreclosure went through. At that point, the debt only goes away through payoff or bankruptcy.
What will be the amount of the deficiency judgment? In the case of a foreclosure, the judge will take the balance due on the mortgage and subtract the greater of the high bid at the auction or the appraised value of the home. When the house is sold in a short sale, the amount the bank received from the sale is subtracted from the mortgage balance.
So, the former homeowner now has a court order which says he has to pay the rest of that mortgage debt to the bank. If there were two or more mortgages or liens, that homeowner may even have two or more deficiency judgments against him.
Immediately after the judge signs the order, the deficiency judgment begins earning interest. If the lender adds its REO expenses to the balance, the interest just keeps climbing higher. There is an interest rate of 11 percent per year on deficiency judgments in Florida. What’s the rate in your state?
After establishing the new debt from the deficiency judgment, a bank typically turns around and sells the debt for pennies on the dollar. Banks know that collecting money from someone who couldn’t pay their mortgage is not worth their time and expense. They prefer to cut their losses and unload the debt on someone else.
And, in addition to that deficiency judgment, you will also take a hit on your credit report and, by extension, your FICO score. A deficiency judgment after a foreclosure stays on your credit report for seven to ten years. Future lenders, employers, or landlords may take one look at that and have second thoughts about working with you.
More properties go into foreclosure every day, and with the increase in foreclosures comes the increase in deficiency judgments. With all the changes going on in the mortgage industry, maybe we will soon see a change in the way that deficiency judgments are handled. Then again, maybe we won’t.
For now, your best strategy is to try and get the lender to see the wisdom of forgiving the debt and reporting the mortgage as “paid in full as agreed” on your credit report. Negotiating that deficiency judgment away is the key to survival here, because it can hang over your head for a long time.
Need to learn more about how deficiency judgments can affect your life? Visit the Strategic Real Estate Coach website. You’ll gain access to weekly webinars on current events in the mortgage industry and more!
Tags: short sale investing, self employment, home business, make money with real estate, real estate investing, short sale, real estateRelated posts:
- Keep Foreclosure Off A Credit ReportAll people from all social backgrounds are suffering from this real estate blight because of uncontrollable situations and the stricter mortgage requirements. So how do you exactly get a foreclosure off your credit record? A foreclosure will typically stay on a credit report for seven to ten years, or depending...
- What Is A Default Judgment and What Can I Do?A corporation, business or someone personally can file a default judgment against you if you owe them money. Default judgments are done in a court of law in order for the person or entity to collect their funds....
- Does a Credit Card Judgment Affect Me?A credit card judgment is a serious infraction on your credit report and a black mark against your credit history. You will not be able to apply for any other credit until it is paid in full. Your wages can be garnished in increments until the debt is paid. This...
- Helpful Tips To Remove Credit Report JudgmentCredit report judgment is an indication of defective credit worthiness that will be dreadful for a number of reasons for your finance management process. Your credit score will decline too fast due to credit report judgment....
- 7 First Time Home Buyer TipsBuying a first home may be the right thing to do financially especially if you have been renting for a long time. For most people their prime investment vehicle is their home and the equity that they build up in it over the years. But, just because you have gotten...
Categories: credit reports
