What Do I Owe After Foreclosure?

Foreclosures often leave borrowers with more payments to make up the difference of the loan.

Foreclosures can be complicated processes, and lenders may have different ways of conducting a foreclosure based on the rules in the state where they operate. Many homeowners assume foreclosures are final, and that there is no way to stop a foreclosure and no need to pay the bank any more money. This is rarely true, but the payments the borrower still owes the bank after a foreclosure vary depending on circumstances.

Foreclosures

A foreclosure occurs when a property owner uses a mortgage loan to buy their property but then can no longer make payments on that loan. To recoup their losses, the lender possesses the property through a legal process. They then sell the property on the market for a reduced rate to receive the money they paid in the loan back again.

Deficiency Judgments

A deficiency judgment is essentially a statement by the lender that details how much an owner still owes after a home is foreclosed. Because the housing market is constantly changing, it is difficult to say how much money the lender will receive after the foreclosure. Often, it does not fully cover the mortgage, so a deficiency judgment is issued showing the borrower how much is left to be repaid. This judgment must be granted by a court to take effect.

Payment in Full

Payment in full is a term lenders use when they are willing to take the property itself in place of any more loan payments. Usually, this is a clause agreed upon beforehand between the borrower and lender. The lender foreclosures the property without any intent to pursue a deficiency judgment.

Short Sales

A short sale is slightly different from a foreclosure. Instead of fully foreclosing, the lender allows the borrower to sell the property and use the money to pay off the mortgage. Again, this does not usually cover the full amount of the loan, but deficiency judgments are more rare in this case. The deal the borrower makes with the lender makes room for the borrower to continue making payments on the rest of the loan after the house is sold. Both parties are likely to know how much they owe ahead of time.

Other Options

If a homeowner's property is being foreclosed, they have a couple options to avoid making extra payments. First, they can try to arrange a "deed in lieu of foreclosure," which grants the lender rights to the property but skips the foreclosure process. A common agreement in these deeds is that the lender will consider the debt fully paid when they possess the property. Also, homeowners can file for Chapter 7 bankruptcy, giving the loan a chance to be wiped away.

References

• Creonline: Do Homeowners Still Owe Money After a Foreclosure?
• Stophomeforeclosurehelp: Foreclosure Myths
• USAToday: Foreclosure hurts long after home's gone, so cut a deal while you can