When dealing with foreclosure, anti-deficiency laws can act as a life raft for many homeowners. They are state laws that come as a form of relief protecting the purchaser of residential real estate used as a primary residence. They work as a shield, stopping lenders from suing borrowers for the difference between the mortgage balance and the foreclosure’s selling price.
When they buy a home, the purchaser usually needs to take out a mortgage. If the purchaser defaults on their mortgage, a foreclosure occurs. During the foreclosure, the lending institution sells the property, trying to cover as much of the mortgage balance as possible. However, this doesn’t always happen. In that case, a deficiency between the sale price and the outstanding balance of the mortgage exists. This deficiency is a loss for the lending institution, and they want it covered.
Looking at an example, we have a purchaser who owes $350,000 on their mortgage. They fail to meet their payment obligations, and the financial institution sells the property during foreclosure for $300,000. The remaining $50,000 is the deficiency.
In trying to recover the deficiency, the financial institution can file a personal judgment against the borrower for the $50,000 and get a deficiency judgment. However, if the property’s fair market value is $310,000, the deficiency is only $10,000. Keep both these options in mind for further analysis.
This is the point where anti-deficiency laws come into play. In the states that anti-deficiency rules are used, the financial institution can not sue the borrower for a deficiency judgment. The financial institution is left with the property and whatever value they managed to recover after the foreclosure.
While most states allow financial institutions to go after their borrowers for deficiency judgments, many states limit the amount that financial institutions can recover even if those states don’t have anti-deficiency laws in place. For example, during judicial foreclosures, the financial institution can request a deficiency judgment as part of the foreclosure lawsuit in most cases. Still, some states call for a separate lawsuit to recover the deficiency. During nonjudicial foreclosures, the financial institution must always file a different suit after the foreclosure against the borrower to get a deficiency judgment.
There are other ways through which deficiency judgments can be limited. As in the example mentioned above, by calculating the deficiency from the property’s fair market value and not from the selling price during foreclosure, the deficiency judgment limits the amount recovered by the financial institutions.
Finally, some states have anti-deficiency laws in place, but even those are conditioned by certain scenarios. Some states prohibit lenders suing for deficiencies after a nonjudicial foreclosure sale. Others only apply anti-deficiency laws to primary residences or only for a first mortgage, while California extends this benefit up to a borrower’s fourth mortgage. Arizona uses anti-deficiency laws, but not for properties bigger than two and a half acres, and Nevada doesn’t allow them if the borrower refinances the loan.
When dealing with foreclosure and anti-deficiency laws, it is always best to discuss with a real estate agent or a real estate attorney as these laws can be subject to change at any time.
While the following states are known to use anti-deficiency laws, contact a real estate attorney if you ever find yourself in this situation. Discussing the situation with them will help determine if these laws in your state cover your particular situation.
Alaska, Arizona, California, Connecticut, Hawaii, Iowa, Minnesota, Montana, Nevada, New Mexico, North Carolina, North Dakota, Oregon, Washington, and Wisconsin are states with anti-deficiency laws in place. However, Hawaii applies anti-deficiency laws only if the foreclosure was executed after July 1st, 1990; Nevada applies other conditions as the loans start on or after October 1st, 2009. There are many such state discrepancies, so it is always important to check with real estate agents in your state of residence or real estate attorneys.