6) When and how does the lender get a deficiency judgment?
This varies from state to state so it’s impossible to give you a 100% accurate answer. Below are general explanations about deficiency judgments in the case of a foreclosure and when a short sale is done. As always, educating yourself on the specifics for your state is the best advice we can give you.
As a general rule in a foreclosure situation the lender can get a deficiency judgment that is determined by taking the sales price of the home when auctioned in a foreclosure sale less the amount due in the mortgage. Often, the amount of the mortgage will be more than the price of the home which can cause a deficiency on the part of the borrower. If the borrower was personally served with the complaint for foreclosure, or refused to show up in court, the lender can then ask the court for the deficiency judgment that can be enforced in a number of different ways. Once a court issues a judgment, it cannot be excused, even in bankruptcy court, although it can be consolidated with a Chapter 13 bankruptcy. This is something that any borrower wants to avoid as it can be enforced by the lender freezing the bank account of the borrower or even attaching their wages. This also, obviously, has a negative impact on the credit of the borrower.
In a short sale situation it comes down possibility vs. probability. It’s possible that a lender could try to come after the borrower for a deficiency judgment, but it’s not probable. In our experience we seldom, if ever see the 1st lien holder go after the homeowner even if the law allows them to do so. In the rare instances where we do see it happen it’s usually the 2nd lien holder or a HELOC that initiates the action because they have likely lost the largest percentage of money (not total dollars) in the short sale. When processing short sales we always go into the deal with the goal of having the homeowner walk away free and clear and we are successful in achieving that goal in most cases.