Will You Ever Have to
Pay a Deficiency Judgment From a Foreclosure?
When a foreclosure is finished and the home is
sold or assessed by an appraisal, for the loss on the mortgage, the deficit
amount the bank will not get back from the mortgage balance and expenses due, is
called a deficiency. In most states, the lender has an option to get a judgment
in this amount against the borrower and this is called a "deficiency judgment".
In addition to the loss of the homeowner’s home he also has the potential of
having to repay this judgment in the future.
Even if the bank accepts a "deed in lieu of foreclosure" they can still get a
deficiency judgment against the borrower. The borrower is the one responsible
for the mortgage or deed of trust payments and he may or may not be the
homeowner. If the homeowner has a co-signer, the co-signer will be as legally
responsible as the borrower to pay back the deficit due. Depending on whether
the foreclosure is judicial or non-judicial, and the specific terms of the
mortgage, the bank may not be able to seek a deficiency judgment. These laws
vary state-by-state and should be reviewed carefully to determine which applies
to the reader.
The bank doesn’t just have the amount of the unpaid loan balance due but also
legal fees, accelerated interest payments, back principal payments, in some
cases pre-payment penalties, and other expenses as part of the judgment amount.
This is why a homeowner who has had his mortgage a couple of years could owe
more than he borrowed originally. As an example, the homeowner borrowed $200,000
in June of 2006 and in January of 2008 he goes into foreclosure and the final
judgment against him could be $218,000! This is because of the additional
expenses and the fact that he pays mostly interest in the first 10 years of his
mortgage.
The largest loss the lender has is his loss of the ability to loan about 7 - 10
times the unpaid mortgage balance. This is because the Federal Reserve requires
the banks to put cash into a non-interest bearing account to cover potential
losses. Since the bank can no longer use these funds to get additional loans
from the Fed, he is losing tremendous loan power. This loss of revenue to the
lender can not be passed on to the homeowner or borrower.
The major factors in deciding whether the lender will pursue a deficiency
judgment are whether the lender feels he can collect the judgment and the cost
to collect it. In the process of working with the homeowner, the lender pulls
his credit and can see what other outstanding bills he has and whether they are
being paid timely. The lender can not see what assets the homeowner has but can
sometimes see where he works. The homeowner will be asked to fill out a Net
Worth Statement ("NWS") which will disclose these assets to the lender. This
document is a major part of the decision to pursue the judgment or not. If the
lender has no reason to believe the homeowner has extensive assets, they will
issue the IRS Form instead. A note of caution - falsifying the NWS can be bank
fraud in some states so be careful if you intend to return the NWS to the
lender.
The deficiency judgment is determined by the court-approved "Final Judgment"
amount in most states. However, in some states, the property must be sold or an
appraisal done to determine the "expected" net loss. If your state does this
procedure by appraisal, contest the appraisal and have the judgment lowered if
you believe it was not correct.
The lender usually chooses not to get a deficiency judgment and instead report
the loan deficiency amount on IRS Form 1099. The result to the homeowner is a
"phantom income" requires him to pay income taxes on this amount. In this
situation the final cost of the guarantor’s foreclosure is the amount of income
taxes he pays the IRS instead of the entire deficiency judgment. This is a
substantial savings to the homeowner and the lender also benefits because there
is no collection on his books that is counted as a liability. Unless there is
suspicion of fraud in the original loan, the lender will issue a 1099. In
December of 2007 legislation was enacted that allows a maximum exemption amount
a homeowner who resides in his property can write off for this deficiency
amount.
Carefully weigh your rights and options when you make a decision to allow your
home to be lost to foreclosure, as there are solutions besides foreclosure and
deed transfer to the lender. Do not be paralyzed with fear that the lender will
follow you forever to collect the deficiency judgment, as you have a number of
options to fight this including attacking the validity of the original loan.
Dave Dinkel is the author of
http://www.StopMyForeclosureMess.com "32 Ways to Quickly Stop Foreclosure
and has helped thousands of foreclosure victims for nearly 33 years. If you are
facing foreclosure, visit
http://www.StopMyForeclosureMess.com StopMyForeclosureMess.com for
guaranteed solutions.
