Beware a Mortgage Deficiency Lawsuit
Foreclosure is a nightmare for homeowners that can drag on for months—and sometimes longer—as borrowers fight to come up with enough cash to save their homes. For those who are unable to do so, the horror may be just beginning. Not only can the lender seize and sell the property, the company may also force the former homeowner to pay any mortgage deficiency that remains after the foreclosure sale.
How Mortgage Deficiencies Work
When your mortgage lender approved your loan, you signed a promissory note agreeing to repay the full balance over time. Foreclosure doesn’t automatically nullify that agreement. Thus, if the proceeds from the home’s sale aren’t enough to cover your loan balance and the bank’s foreclosure costs, you are legally liable for the deficiency. Your lender can either write off the deficiency as a tax loss or pursue you for payment after the foreclosure sale.
Mortgage Deficiency Lawsuits After Foreclosure
Your lender reserves the right to sue you for an unpaid mortgage deficiency. Lenders know, however, that few former homeowners have the disposable income after foreclosure to make payments on a mortgage deficiency. After all, if you had extra income, you would have used it to pay your mortgage payments. Because of this, some lenders wait several years to sue borrowers. This gives your finances time to recover. Once you’re back on your feet, your lender stands a much better chance of recovering the deficiency.
Civil Judgments and Your Credit
When a creditor sues you and wins, it obtains a civil judgment. Civil judgments are public records and, as such, appear on your credit report. Although civil judgments are negative entries, a judgment you receive immediately after foreclosure isn’t likely to have a significant negative impact on your credit scores. This is because your scores have been recently decimated by foreclosure, and the lower your credit scores are, the less damage a negative entry can do.
If your lender waits several years to sue you, the damage you’ll sustain from the civil judgment may be much higher. Provided you manage your finances responsibly, your credit score will gradually improve as the foreclosure notation ages. A higher credit score means that negative entries carry more weight, and the lender’s civil judgment may just knock your credit score back into the dust.
Deficiency Judgment Enforcement
State laws vary regarding how long your lender has to enforce a civil judgment. Many states, however, have an enforcement period of a decade or longer. If the lender does not successfully collect the full deficiency balance by the time the enforcement period expires, the company has the option to renew its judgment for a second enforcement period.
Your refusal to pay your outstanding mortgage deficiency means little to your mortgage company. The civil judgment grants it the ability to force you to pay by garnishing your wages, levying your bank accounts and, in some cases, seizing your personal property. These forced payment methods will continue until the lender either recovers the judgment amount or the enforcement period expires.
If you are underwater on your mortgage and are struggling financially, taking advantage of the foreclosure alternatives available to you is more important than ever before. Even homeowners in non-recourse states where lenders are legally prohibited from pursuing a mortgage deficiency are at risk of legal action from second mortgage and HELOC lenders. If you are having trouble paying your mortgage, contact your lender immediately and ask for help. A loan modification or mortgage forbearance can give you the extra time you need to catch up on mortgage payments, save your home and prevent a mortgage deficiency.
Debt after Foreclosure: Beware a Mortgage Deficiency Lawsuit