A common misconception among consumers is that after foreclosure they will not owe their mortgage lender. Many homeowners who go through foreclosure are surprised to learn that they still owe money on their house, even though they no longer own it! Most mortgage lenders require borrowers to personally guarantee the amount of the note, leaving the lender with two avenues of collection in the foreclosure scenario.
When a borrower loses their home to foreclosure and still owes their lender money after the sale, the remaining debt is usually referred to as a deficiency judgment. For example, if you owe $500,000 on your mortgage and can no longer afford to make payments on the note, your lender will institute foreclosure proceedings against you and will eventually sell your home at a public sale. If the home sells for $400,000 and your state allows lenders to collect deficiency judgments, you will owe your lender $100,000 after the sale. In many cases, this deficiency judgment is a tough pill to swallow for the borrower who just lost their home and yet still owes their lender after foreclosure!
Borrowers who are left facing a large deficiency judgment after foreclosure often turn to bankruptcy in order to protect their assets. In order to determine whether you will owe money to your lender after a foreclosure sale of your home, it is important to get a handle on two important items of information: 1. How much is your home worth? Regardless of your states deficiency laws, if your home will sell at a foreclosure sale for more than what you owe, you will not be obligated to pay anything to your lender after foreclosure. Your lender is obligated to apply the sale price of your home to the mortgage debt. Only when a home is ‘underwater’ meaning the borrower owes more on the mortgage than the home is worth, will he or she potentially face a deficiency judgment after a foreclosure. 2. Does your state have an Anti-Deficiency Statute? Not all states allow lenders to collect on the note after a home has been foreclosed on. These states are referred to as ‘Non-recourse’ states because they only allow the lender to take back the collateral for the loan (your home) they do not allow the lender the additional remedy of going after the borrower’s personal assets if the sale of the home does not satisfy the mortgage.
In a non-recourse mortgage state, borrower’s are not held personally liable for their mortgage. If the foreclosure sale does not generate enough money to satisfy the loan, the lender must accept the loss.Some states that have anti-deficiency legislation qualify it by only making it applicable to seller financed or ‘purchase money’ mortgages. North Carolina is a good example. North Carolina’s anti-deficiency statute applies when the seller of real estate provides the financing for the purchase. In such a situation, the legislature has prohibited the seller/lender from seeking a deficiency judgment after foreclosure. The purchase money lender has recourse only against the collateral for the loan and not against the puchaser/borrower in her individual capacity. Banks who have made mortgages in North Carolina are allowed to seek deficiency judgments against borrowers. The lesson to be learned is that if you owe more on your mortgage than your house is worth and the property is in a state that allows lenders to seek deficiency judgments, you may still owe money even after foreclosure. It is advisable to consult with an attorney to discuss how your state’s laws will affect you. Below is a list of states that have some form of Anti-deficiency statute:
North Carolina (applies to seller financed transactions only)