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Struggling with a house payment every month can be stressful. According to MarketWatch in September of 2020, “Around two-thirds of homeowners in forbearance have extended their forbearance arrangements with their mortgage servicers after the initial stage.” However, next year, many homeowners may face foreclosure as their forbearance time runs out.
You may be looking at your finances and wondering how you will cope with your house payment in addition to your daily living expenses come next year. However, if you live in Texas and are considering foreclosure for your home, you may want to think again.
What is a Deficiency Judgment?
Foreclosure can cause many problems, not the least of which is a deficiency judgment. This is basically when your lender sues you and a court decides that because you did not completely pay off your loan in full, that you still owe money. The lender took the house back to cover your debt and you no longer own the house, but your house wasn’t worth enough to cover the amount of the loan that you took out.
Because a mortgage is a “secured” loan, the lender can take the house back to pay your loan during the foreclosure process, but they can also sue for money if the house doesn’t pay back the loan completely. If a court rules in favor of a lender in a deficiency judgment case, the court can place a lien on you for further payment. However, the lender has to sue you within 2 years of the foreclosure sale of your home or it is not valid.
Ways to Prevent Deficiency Judgment in a Foreclosure
Determine Fair Market Value
If you are pursued for a deficiency judgment, you can request that the court determine the fair market value of the property as of the date of the foreclosure sale. Your lender could be deflating the value of the property in order to get a larger judgment against you. Your attorney can present evidence that includes:
(1) expert opinion testimony
(2) comparable sales
(3) anticipated marketing time and holding costs
(4) cost of sale
(5) the necessity and amount of any discount to be applied to the future sales price or the cash flow generated by the property to arrive at a current fair market value
If you don’t dispute this amount and present evidence of the value of your property, the court will automatically use the value of the home at the time of the foreclosure sale to compute how much you still owe the lender. This process of presenting evidence about the fair market value of the home prevents the lender from accepting a lowball offer and suing for the balance from the borrower.
Keep Private Mortgage Insurance (PMI) on Your Home
If you have private mortgage insurance, they will pay the amount of the deficiency judgment and prevent this seeing the courtroom. If you have paid PMI monthly before your foreclosure, be sure to bring this up with your lender and make sure that they do not plan to sue for monies after the foreclosure goes through.
Declare Bankruptcy
When you file for bankruptcy, your liability for your mortgage is gone. The mortgage lender can’t make a claim for a deficiency judgment at this point and all of your unsecured debt is discharged. While bankruptcy prevents a deficiency judgment, it cannot solve all of your problems. Bankruptcy causes your credit score to drop so low that it is hard to buy anything on credit for 7 years.
File a Motion
If it has been more than 2 years since your foreclosure sale, the lender is not legally allowed to sue you. There could be other reasons that your lender cannot sue you. Discuss your case with an attorney to find other ways to fight against a deficiency judgment in your particular case.
Why Deficiency Judgements Happen
Right now, there are plenty of buyers for real estate, so a deficiency judgment is not as likely as they were back in the housing market crash of 2008. At that time, the value of houses went down to entice buyers. If you wanted to sell but your house back in 2008, but the value had gone down, the home often was not worth the amount of the loan you had taken out.
If you had taken a home loan for $200,000 in 1998 but then needed to sell in 2008 because you couldn’t make your monthly mortgage payment, you would have been in trouble. In 2008, the home might have been worth $100,000. If you went into foreclosure, the lender could take the home to pay off your mortgage loan, but they could only sell your home for $100,000. You owed them $200,000, so they could take you to court and sue for the remaining $100,000 and the court could rule against you.
Short Sales
Deficiency judgments can also happen in a short sale, where the bank sells your home for less than it is worth. To prevent this scenario in a short sale agreement with a lender, your short sale contract should say that the bank waives its right to the deficiency. If the legal agreement does not contain that language, they can come after you for the difference.
Tax Considerations
If a creditor has discharged (canceled or forgiven) a debt you owed, the forgiven debt is considered income by the IRS and subject to taxes. You are required to include the discharged amount in your income, even if it is less than $600, on the “Other income” line of your Form 1040 or 1040-SR. However, you may not have to include all of the canceled debt in your income and there are exceptions and exclusions, such as bankruptcy and insolvency.
Find Help
If you are considering foreclosure and worried about a possible deficiency judgment, know that there are good alternatives to foreclosure. An experienced foreclosure real estate attorney can help you find answers that prevent foreclosure and keep you in your home or help you find ways to sell your home. Talk to your attorney to find solutions to foreclosure associated legal problems and find that you are not alone in your struggles.