Do You Still Owe the Bank If Your House Goes to Foreclosure?
Experiencing a foreclosure on your home is challenging enough, but if you live in a state that uses a judicial foreclosure process, you may still owe on your home after the foreclosure is complete. Legally referred to as a deficiency judgment, as the foreclosed borrower, you may be responsible for the difference between the unpaid mortgage balance and the amount for which your home was sold at the foreclosure sale.
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Judicial Foreclosure
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A judicial foreclosure is one that goes through the court system. In effect, the lender is required to petition the court for permission to repossess the house and property that secures the loan. Judicial foreclosure is rare in some states, but is the preferred or only foreclosure remedy in other states. The foreclosure method for your mortgage or deed of trust is specified in the mortgage or deed of trust that you sign when you acquire the loan for your home.
Deficiency Judgment
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Even though your state may allow judicial foreclosures, it does not necessarily mean that the lender can, or will, pursue a deficiency judgment. Approximately 30 states permit a lender to seek a deficiency judgment from the borrower in the event of foreclosure. The language in your mortgage frequently has many components, including a pledge and a promise. You pledge the home you are purchasing as security for the loan. You promise to pay the debt. If the property sells for less than what is owed at the foreclosure sale, your "promise" may convert from a secured debt (the home that is being foreclosed) to an unsecured debt. This means that you still owe the money but have no collateral against that debt.
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Timing
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A lender does not have to immediately pursue a deficiency judgment through the court system. State laws dictate the amount of time a lender has to seek a deficiency judgment. For example, Florida law permits a lender to wait for up to five years before seeking a deficiency judgment. Once the deficiency judgment is ordered, the judgment remains valid for 20 years and can accrue interest as well.
Know Your State Law
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In some states, a foreclosed borrower has some recourse and defense against a lender seeking a deficiency judgment. For example, North Carolina Statute 45-21.36 permits a borrower to prove the "reasonable value of property" at the time of the foreclosure. That amount can be compared to the amount for which the property was sold at the foreclosure sale to either reduce or eliminate the deficiency judgment. Laws vary from state to state; it may be wise to consult an attorney about your specific circumstance.
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References
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