Foreclosure does not necessarily mean zero mortgage balance

Feb 4, 2010 | | Posted in Mortgage

Media have reported millions of homes that have been foreclosed by banks the past year or so. That does not necessarily mean, after the foreclosure, the homeowners are off the hook from then on and the mortgage balance would automatically come down to zero. In cases where the bank auctioned off the home for less than what the homeowners owed in mortgage, they still have to pay the difference.

Let’s say the remaining mortgage owed on the home was $200,000 and it was foreclosed and done with selling or auctioning off for $150,000, the homeowner is still liable for the difference of $50,000 that they have to pay to the mortgage lender.

Many homeowners have faced this dilemma. There have been folks, maybe still are, who took out bigger loans than they could afford. Other folks hid behind what in the industry is known as liar loans. That simply means they didn’t have to verify their income. The mortgage lenders just didn’t care to check.

Now the sky has fallen on most of us in terms of falling prices of our used-to-be precious homes. Good decent folks who always paid their mortgage on time have faced financial death in the form of unemployment or to a lesser extent job transfer. In circumstances like these, many homeowners are stuck with their homes. When they want to sell, they might sell at a lower price than the remaining mortgage they owe.

As a result, the homeowners are being forced to short sell or foreclose and are getting caught up in deficiency judgments.

What can you do to protect yourself from deficiency judgments
Nothing much except pray that the lenders – out of the goodness of their heart [that will be the day] – forgive the difference [I don't believe I said that] – an impossibility. In other words, you will be haunted and harassed until they hunt you down.

For foreclosure, lenders can pursue deficiencies in more than 30 states, including Florida, New York and Texas, according to the U.S. Foreclosure Network, an organization of mortgage law firms.

Some states, such as California, are “non-recourse” and don’t allow deficiency judgments. But, even there, if the original loan was refinanced, some or all of it may be subject to claims by the lenders.

In a Nutshell
For all of us, it’s unfortunate to go through foreclosure. On top of that, some of us have to deal with deficiency judgments. I hope the situation gets better for all of us and nobody has to go through these hard times again.

What do you think?

Information contained herein is general in nature, and is provided for informational and educational purposes only. Past performance is no guarantee of future results. Talk to your financial adviser.

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Shafi enjoys writing articles on a variety of subjects, paying off debt - at present he is debt free - giving to charities, likes dark coffee, and helping people succeed in their finances and careers. Please Contact Shafi to write for this blog. He also owns How to create your first website.