Defaulting on a home loan can have major financial consequences for the borrower. One form of default occurs when you don’t make your mortgage payments. When this occurs, the bank may decide to pursue a foreclosure on the property. Depending upon the state, the bank may be able to come after you for money following the foreclosure.
A foreclosure permits the bank to take possession of the home. The bank will seek to recoup some of the money owed on the mortgage loan. To do this, the bank will generally place the home up for sale. If the price of the home sale doesn’t cover the balance due on the mortgage loan, the difference is referred to as a deficiency. Depending upon your state law, you may be responsible for the deficiency amount and the lender may be able to pursue collection of that amount from you.
Recourse and Non-Recourse
Some states have loan recourse laws that permit a bank to seek legal action for a deficiency. In these states, the bank can file a lawsuit against you. The goal of the lawsuit is to obtain a judgment for the deficiency amount. Other states are non-recourse. This means that if you default on the mortgage loan, the bank can foreclose on the property but cannot sue you for any remaining deficiency amount. In this case, the bank will write the deficiency amount off as a loss. Check with your state’s attorney general to see if your state is recourse or non-recourse.
A deficiency judgment can place your personal assets at risk. A judgment gives the judgment owner the legal right to go after your assets in satisfaction of the judgment debt. For example, the bank may be able to garnish some of your employment wages. It may also be able to seize money in your checking or savings accounts up to the amount owed under the judgment. Plus, the bank may be able to place a lien on property that you own.
A deficiency from a foreclosure can follow you for several years. Even if you’re insolvent now, or currently lacking assets that the bank can seize, a judgment gives the bank the legal right to pursue payment of the judgment from you for years to come. Judgments have statutes of limitations and within this time frame, the bank may try to seize your assets. This time period will vary from state to state. In Florida, for example, the statute of limitations on judgments is 20 years.