A deficiency judgment is “a judgment lien against a debtor, defendant or borrower whose foreclosure sale did not produce sufficient funds to pay the mortgage in full.”
In plain English: a homeowner can be sued for the difference between the amount the bank received when they auctioned off the house at the Sheriff’s sale, and the amount of the outstanding mortgages.
Minnesota is a ‘Non-Recourse’ state. This means that FIRST lien holders CANNOT seek judgment (cannot sue) former homeowners for outstanding funds. HOWEVER... any “Junior” lien-holders CAN. If there is more than one mortgage on the property – or if there is a line of credit or HELOC taken out against the property – THOSE lenders CAN sue the former property owner for payment of any outstanding debt!
Here’s a realistic scenario:
- If a homeowner purchased a $200,000 home in 2005 and financed the purchase 100% using an 80/20 loan (80%, or $160,000 financed with one lender who holds first lien position, 20%, or $40,000 financed with a second lender who holds second lien position).
- Now, given current market circumstances in Minnesota, the home may only sell for $150,000 at the Sheriff’s Sale.
- The first lien holder (who was owed $160,000) is wiped out. The homeowner does not owe this first lien holder any additional funds, and the first lien holder CANNOT sue the former homeowner for the ‘deficiency’ of $10,000. ($160,000 - $150,000).
- HOWEVER… the second lien holder CAN sue the homeowner for their ‘deficiency’. In this scenario… they can sue for the ENTIRE outstanding amount of $40,000. (To keep the math simple, we’re assuming that no principal was paid down in the last 5 years).
If the lender seeks a deficiency judgment, the former homeowner may find themselves having their wages garnished, tax returns withheld or garnished and other consequences.
Here’s the kicker - - - lenders can take up to
Former homeowners may find themselves being sued for outstanding mortgage debt YEARS after a foreclosure... just as they begin to rebuild their financial lives.
Jennifer Lancour, a Housing Counselor at PRG, Inc., one of the organizations that work with the Minnesota Home Ownership Center to offer Foreclosure Prevention Counseling, stated recently:
We’ve always counseled clients about the possibility of Deficiency Judgments in situations where there is more than one lien on a property. But in the past it was unlikely that a lender would seek judgment. Since the middle of last year, we’ve started seeing more and more clients coming back to us after a foreclosure looking for assistance because they’ve been served court papers.In addition, Homeowners also need to be EXTREMELY careful when negotiating a SHORT SALE on their property as well. If the negotiations aren’t done properly, even the FIRST lien holder can seek judgment for any deficiencies.
The MN Home Ownership Center has a helpful fact sheet on its website about deficiency judgments (with MANY thanks to the Housing Preservation Project for their work!). You can download the fact sheet here.
Deficiency Judgments are just ONE of the MANY considerations struggling homeowners need to think about when facing a possible foreclosure. If you, or someone you know is struggling with mortgage payments... don't wait until it's too late. To find your local non-profit, FREE Foreclosure Counselor, click here. For additional information about preventing foreclosure in Minnesota, click here.