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Breaking Down Deficiency Judgments

A deficiency judgment is a court order for debt payment. People most commonly think of a deficiency judgment in relation to a foreclosure. The homeowner owed the lender money on the mortgage, did not pay, and the lender foreclosed. However, the foreclosure sale of the home did not bring in enough proceeds to pay for the value of the house. For example, the original mortgage was $250,000 and the borrower owed $200,000, but the home sold for $175,000. The deficiency is $25,000. The court could render a judgment that the borrower pay the $25,000 to the lender and that would be the deficiency judgment.

In today’s market, there are underwater mortgages. Underwater mortgage is a term that means the home is worth less than its mortgaged value. While already struggling because of an unexpected illness, divorce, job loss or other hardship, people may decide they can no longer afford to keep their homes. They decide to sell the home to pay off the mortgage or just allow the lender to foreclose. However, they may have a problem with an underwater mortgage. As in the example above, if already strapped with debt, the borrower no longer has a house but also has to come up with an additional $25,000.

Can your lender pursue a deficiency judgment?

Whether or not your lender can pursue a deficiency judgment depends on the laws of the state where you live. There is also the factor of whether it is worth it to the lender to take legal action. If you do not have assets or the means of paying a deficiency, lenders may just cut their losses and not pursue the matter. Some lenders agree to a short sale where they accept the proceeds for a home sale and call the balance even.

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