Bank Filed A Judgement Against Me. NaborsNorris Real Estate
Can a Bank File a Deficiency Judgment After a Foreclosure or Short Sale?
Question: Can a Bank File a Deficiency Judgment After a Foreclosure or Short Sale?
Answer: Deficiency judgments sometimes pop up after a foreclosure or short sale. That’s because many sellers don’t obtain legal or tax advice in advance, so the deficiency judgment comes as a surprise. Moreover, deficiency judgments are a complicated process to understand.
Promissory Notes and Mortgages
Contrary to what people think, deficiency judgments stem from the fact a borrower defaulted on a promissory note, not the mortgage. A promissory note is a promise to pay. It can also provide for personal liability, depending on your state laws. Personal liability means the lender can come after your assets if you do not make your payments.
A promissory note is secured by either a trust deed or a mortgage, depending on the financing instrument each state uses. Typically, the mortgage or trust deed is recorded in the public records where the property is located, which gives the public constructive notice that the home has a lien against it.
If the promissory note is not paid as agreed, the beneficiary has the right to foreclose upon the property, because the property is the security for the promissory note.
If the borrower does not bring the payments current or pay off the existing loan(s) during the foreclosure period, the home will go to auction. If the home sells for more than the amount that is owed, there is no deficiency; however, that rarely happens. Generally it sells for less.
Banks get the home in foreclosure when nobody bids enough to pay off the bank. The bank also has a right to sell the home for less to the highest bidder at the auction, but generally banks prefer to sell to a private party after the foreclosure, hoping to get more money on the open market.
While the home is pending foreclosure proceedings, sometimes banks will agree to cut their losses. They do a short sale by accepting less than the amount that is owed.
The home seller hires a real estate agent to find a buyer for the short sale. The buyer makes an offer and, if the bank accepts it, the home is sold at a loss to the bank.
A deficiency is the difference between the fair market value of the property and the amount received, providing the amount received is less than the amount owed.
Whether the bank can pursue a deficiency judgment after a foreclosure or short sale depends in part on whether the promissory note makes the seller personally liable for the debt. Some states allow for personal liability.
Some hard-money lenders sell the promissory note to an investor after a foreclosure for pennies on the dollar. Then, the investor will attempt to collect the debt.
Even though a lender may have accepted, say, $1,000 for a $100,000 second mortgage through a short sale, the security for that hard-money second is released but the promissory note may not be. A short sale seller might believe the ordeal is over, until one day he receives a phone call, asking for repayment.
Realize that the lender most likely will negotiate for a discounted payoff.
The lender may ask for a new promissory note to replace the old promissory note. In that event, make sure the lender sends a “paid in full” promissory note.
If the lender has already sold the note, the discount may be greater.
Not all hard-money promissory notes must be paid in cash. Some lenders will accept payments.
If the lender directs payments to another entity, realize that the note may have been sold at less than its face value, and that new lender may accept an even lower amount as payment in full.
After the note is paid in its entirety, ask the lender to return the promissory note marked “paid in full.”
We are not licensed to give legal advice and provide this information for general information purposes only. If you desire legal advice or more information, please contact a real estate lawyer.