It’s important to know how to avoid a deficiency judgment. A deficiency judgment does not have to be part of a short sale.
What is a Deficiency Judgment?
A deficiency judgment happens when a bank goes after the former homeowner after a short sale is completed.
A short sale is when a home is sold for less than what is owed. The difference between the sale price and the total owed is the deficiency.
When a lender tries to recoup this money from the seller, the process is called a deficiency judgment. People who go through a short sale definitely want to avoid a post-sale judgment.
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To Avoid a Deficiency Judgment, Do Your Research
Each state has different laws regarding deficiency judgments, so there is no hard and fast rule about this process. It also depends on what kind of mortgage you have.
A recourse loan allows the lender to come after you to recover the difference between the sale price and what was owed. A non-recourse loan prevents the bank from pursuing a deficiency judgment.
In a 2014 interview on National Public Radio NPR, Geoff Walsh, a U.S. National Consumer Law Center staff attorney, said mortgage holders are going after the shortfall more and more often because borrowers do not understand their rights.
Should You Consider a Short Sale?
To get a deficiency judgment, the bank must take you to court and get an order from a judge. This involves additional expense to the lender as well as the risk of not winning the case in court.
So, if you are considering a short sale and want to avoid a deficiency judgment, the questions you need to ask, in order are:
1. Is my loan a recourse or non-recourse mortgage?
2. What is the law in my state?
3. Can my lender sue?
4. Will my lender sue?
If your loan is non-recourse, you have nothing to worry about once the short sale goes through. Sell the property and walk away.
If the loan allows recourse, then your state allows deficiency judgments and the mortgage company can sue to recover that money.
If your state has laws that block a deficiency judgment, you have nothing to worry about.
If your state does allow deficiency judgments and your loan allows recourse, you still may be able to avoid it. Even states which allow this court action have exceptions.
Each state’s laws vary on how and when a lender can seek a deficiency judgment. Find out what is and is not allowed.
If the lender can sue, then you have to wonder if they will sue. Enter short sale negotiations with that in mind. Try to eliminate any effort to get a deficiency judgment.
You will need to explain your financial situation and prove what you say. If you have any assets the bank can easily seize, it may be hard to stop the lender from coming after you.
If you don’t have any money or assets, the mortgage company is far less likely to pursue you after the sale.
Regardless of the law in your state, you can negotiate with the mortgage company.
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