Understanding Deficiency Judgements

A mortgage deficiency judgment is the court order a lender can secure after a borrower has failed to repay the entire promissory note secured by a home loan on their property.

Should a 2nd mortgage exist, the creditor also has the right to initiate legal action against the borrower.

However, the bank or lender is required to take the borrower to court and win a lawsuit to obtain a deficiency judgment, which is costly, time-consuming, and not easily accomplished. Instead, many lenders issue a 1099C (cancellation of debt), and take the loss.

Quick Background: When a borrower purchases real property with a mortgage loan, they enter into a contract with a lender, which is evidenced by the recorded note. Under this contract, the borrower agrees to repay the financing that helped purchase the property.

Unfortunately, many responsible borrowers have been forced into an unfortunate position and are unable to sell their home for the same value it had when it was purchased. Often, the only options are selling through a short sale, or lose it to foreclosure.

At the point a property is sold as a short sale or foreclosure, obviously a sum of money is lost to the lender. This is typically the difference between the original loan amount (plus costs, lost interest, etc.) and the sale price. The difference is known as a “deficit” or the deficiency amount.

Example: A property with a $200,000 first mortgage is sold in a short sale for $150,000. $125,000 of that amount goes to the lender who holds the primary mortgage, creating a $75,000 deficiency amount. In most states, the lender has the right to pursue that borrower in an attempt to collect the deficit after the property is sold.

Be assured that in many cases, a competent Realtor® can obtain a waiver of that deficiency collection on the borrower’s behalf. The HHC Team has assisted hundreds of seller through successful negotiations that have resulted in not having to repay a deficient amount.