If you're having doubts about your ability to pay your mortgage or come to any resolution with your lender that allows you to keep your home, you may be wondering what your options are for exiting your home, and what responsibilities are associated with each choice. Whether ownership of your home is transferred through a short sale, deed in lieu of foreclosure agreement, or foreclosure sale, one of the most important things to be aware of is that you may be responsible for a deficiency. But, with a little bit of help and some planning, you may be able to get a deficiency judgment waiver that allows you to walk away from your home without owing any money.
What Is A Deficiency?
A deficiency occurs when the amount your property sells for is less than the balance of your loan. It can result after a short sale, deed in lieu of foreclosure, or foreclosure sale. For example, if you owe $225,000 on your mortgage and your lender sells the property for $150,000 in a foreclosure sale, you have a deficiency of $75,000. The lender has a right to file a lawsuit against you for that deficiency amount (plus fees), and will do so if they believe they can get that money from you. If they are successful, the deficiency becomes a deficiency judgment. You don't want that, you want them to waive their right to sue you if at all possible.
Deficiencies are common with distressed homeowners. After all, if the homeowner weren't underwater in the first place, the home could be sold and the loan paid off with the proceeds from the sale. If your lender agrees to a short sale, a deficiency is a matter of fact. By definition, you're “short” the amount you owe. But, even if your home sells for the precise amount you owe, the lender could still consider you deficient because of the costs incurred during foreclosure proceedings and sale, and the amount of money you were behind on your mortgage payments.
So, when you're leaving your home, you'll definitely want to practice a little CYA (Cover Your Assets). Even if you don't have much, it is possible that the lender could sue you for the deficient amount years after the short sale or foreclosure sale is complete. Lenders have been known to wait for a foreclosed homeowner to get their financial life back on track, then sue and demand payment. They can garnish your wages (not with parsley), take money from your bank accounts, and place liens on your personal property. Even worse, you can be responsible for years of accrued interest on the deficiency! If you're not fully aware of all the ways the debt from the sale of your home can come back to haunt you, it can seem to come out of nowhere.
How Can You Get a Lender to Agree to a Deficiency Judgment Waiver?
If you didn't know before, you should now understand the importance of getting a deficiency judgment waiver. But, why would a lender agree to something that says they won't file a lawsuit against you to get money they are legally entitled to? They might agree to waive their right to seek a deficiency judgment because they don't want to spend a ton of money in the courts trying to get a judgment against you. It is also in their best interest to have you cooperate with them so you'll vacate the property without an eviction, and leave the home in acceptable condition. Angry homeowners have damaged property on purpose out of spite and cost lenders a lot of time, money, and headaches.
So, there are reasons for your lender to waive their right to pursue you for the deficiency. You should ask your attorney to include language about waiving the right to a deficiency judgment in your short sale, deed in lieu of foreclosure, or foreclosure agreement. It may take some negotiating, and there will be language that states what your responsibilities are in exchange for their concession. It's very important, and you need it guaranteed in writing. Remember that there may be tax implications for removing the debt on your mortgage that you should be aware of.
Alternatives to a Deficiency Waiver
If there's really no way your lender will agree to a waiver, or you already have a deficiency judgment, you should consider a payment plan or settling for a smaller amount that you can pay back over a period of time. You might choose to declare bankruptcy. Chapter 7 bankruptcy will discharge the deficiency judgment, while Chapter 13 would allow you to make payments rather than a lump sum.
Some homeowners assume that transferring ownership of their home to the bank or another buyer absolves them of any responsibilities with the property and loan. They feel that “The lender is taking my home and I'm broke! What else could they possibly want, money for a house I don't even own anymore?” Yes, they do, and they're legally entitled to it. Which is why it's so important to get them to agree to waive their right to sue you for a deficiency judgment.
If you don't have extensive experience with foreclosure defense, you may not have known that getting a deficiency judgment waiver was even a possibility. Working with a qualified attorney can give you a better chance of leaving your home with less debt and negative impact to your credit. Although hiring an attorney will cost some money, it's nothing compared to the potentially tens of thousands of dollars you could save by avoiding a deficiency judgment. In many situations it's possible for a homeowner to keep their home by getting a loan modification that brings their payment to a more affordable level. The sooner you speak with someone well-versed in the area you're having problems with and begin to plan, the better your odds are of getting what you want.
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