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Can I Be Sued For Deficiency?

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One of the most overwhelming situations you can face in life is the loss of your home. Even if you have opted for foreclosure or short sale, there are high chances that you are still accountable for the deficiency balance unless negotiation has taken place between your attorney and/or bank to waive the balance amount accumulated after the sale period.

Judging the Deficiency – Where the received amount is less than the amount that was owed, a deficiency arises as the difference between the two. If the promissory note depicts that the seller is liable for the arrears, the bank would have a right to pursue a deficiency judgment after the completion of the short sale or foreclosure.

Deficiency Judgments – As per the US Foreclosure Network, Lenders are not allowed to track the deficiency balance except in the case where a mortgage loan is refinanced in a recourse loan. Furthermore, borrowers are also exempted for deficiency judgments pertaining to purchase-money loans on a one to four unit residential dwelling. Check with your state for more details. 

Short sale and Deficiency – The law Senate Bill 458 (SB458), signed into by Governor Jerry Brown on July 15, 2011, affirms that the first and second lien holders should waive off the remainder balance of a loan after the end of a short sale on a property. (The Senate Bill 458 is an extension of Senate Bill 931, signed into effect in October 2010, which prohibited the first lien holders from filing a deficiency judgment subsequent to a short sale.) The anti-deficiency protection was expanded by the Senate Bill 458 to all second lien credits to 1 to 4 unit properties. The bill keeps second mortgage holders from holding a borrower accountable for the outstanding balance on a loan at the end of a short sale. Nevertheless, this does not provide protection for individuals undergoing foreclosure. Besides, junior lenders like a second or third mortgage as well as HELOC’s are no longer permitted to pursue a deficiency after a closed short sale.

Recourse Loans vs Non-Recourse Loans: 

Recourse Loans – If you have refinanced your loan(s) after the purchase of your property, you have created a recourse loan. Personal risk is created by such loans as they permit a lender to charge you if you default on the owed amount. In other words, defaulting on a recourse loan, the lender has the right to file a deficiency judgment against you even if they have endorsed the collateral.  They would also hold the right to garnish your earnings, levy bank accounts, and strive to extract the amount you are liable for in this situation.

Non-Recourse Loans – If the original loan(s) was utilized for purchasing property, it can be termed as being a non-recourse loan. This type of loan prohibits a lender to claim anything but the collateral in case the borrower defaults on payments. This option is riskier for the lenders as they are not allowed to claim a deficiency judgment or any other legal action against you in case of default. In order to minimize this risk, lenders offer a lower loan amount with higher rates of interest as compared to recourse loans. 

A loan being recourse or non-recourse if often determined and dictated by State laws. Although some states provide lenders with the flexibility to select how they wish to claim defaults, a lot of lenders opt for not suing as the defaulting borrowers usually do not have much to charge for.

HELOC and Home Equity Loans:

If a lender agrees to loan out a maximum amount of money under the agreement that collateral would be provided in exchange, the loan would be called as a Home Equity Line of Credit (HELOC).

A HELOC is different from a conventional home equity loan as the borrower does not advance the whole amount upfront and instead places a line of credit against the amount borrowed. The borrowed amount however cannot sum up to be more than the value of the collateral. In case the HELOC is used at the time of purchasing the property, it would be considered as a purchase money loan.

Foreclosure and Deficiency - There are three ways in which lenders can foreclosure on a property in . These can include foreclosure through lawsuits, through non-judicial methods such as a trustee’s sale, or through judicial methods of foreclosure. Check with your state to find out what is more common. 

The foreclosure process is usually initiated by the first mortgage and allows the property to be taken back. Depending if your state is judicial or non-judicial, if the lender claims the property back through a trustee’s sale, then under the State Law, he would not be able to hold the borrower for a deficiency balance that results from the first mortgage used for purchasing the property.

Nonetheless, in the case where there are two mortgages and the first one is foreclosed through a trustee’s sale, the unpaid second mortgage with a wiped out security interest might still be able to pursue the borrower subsequent to the foreclosure. If the loan is recourse, the claim can be for the full balance of the loan.

Lender may pursue you if:

FHA and VA loans – Despite anti-deficiency protections, you may be personally responsible if you have a loan insured by the Federal Housing Administration (FHA) or the Veteran’s Administration (VA).

Loan Fraud – You may also be held personally answerable for loan fraud regardless of the anti-deficiency protections if you are to provide any misrepresentations to your lender.

Bad Faith Waste – Regardless of the anti-deficiency protections, you may be personally accountable for bad faith waste if you damage or destroy the property by action or inaction on purpose.

The major benefit of doing a Short Sale is that our team of experts can negotiate with a lender for not pursuing the homeowner once the short sale ends.

Note –  It is highly advisable to consult an attorney or licensed professional for more information regarding your situation before going for a short sale, foreclosure, or deed-in-lieu.

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