No one wants to go through a foreclosure. But sometimes the circumstances mean that it’s the only option available to you. When it happens, you need to understand what can happen so that you don’t get surprised. A deficiency judgment is one of those surprises which can lurk around the corner.
How deficiency judgments work
Let’s say someone owes $200,000 on their mortgage but is unable to pay it. They fall behind and the lender begins foreclosure proceedings. Once the required notices have been given and the mortgage is not brought up to date, the lender conducts a foreclosure sale.
At the foreclosure sale, the home sells for $175,000, less than what was owed on the mortgage. A $25,000 deficiency has been created – money which the borrower still owes the lender. Texas law allows the lender to go back to court and seek a deficiency judgment against the borrower for the unpaid balance.
Depending upon the circumstances, the lender may not actually seek a deficiency judgment even if the law allows it to, since it costs time and money. But if it does, the judgment is a court order for the balance, which may be collected using normal collection means. This can include steps such as garnishing wages.
One important thing to note is that the borrower may be able to mitigate the amount of a deficiency judgment. Using the example above, when the judgment is sought by the lender, if the borrower can show that the fair market value of the home was actually $195,000, the court can reduce the judgment to $5,000. The fair market value, rather than the amount received during the foreclosure sale, becomes the governing number.