Once a property is sold at foreclosure or when the property is sold as a short sale, there will be a remaining deficit of what is owed to the lenders who are holding any mortgage debt. While state laws may affect what constitutes as deficiency, usually it will be the difference between the original loan amount plus any past due interest, less fair market value of the home. Most often the sale price will be accepted as fair market value.
Example: A home with a $360,000 mortgage balance is sold on a short sale for $230,000. This creates a roughly a $130,000 deficiency amount.
If the state the property is located such as my State, Nevada, the loan is likely a recourse loan and the bank experiencing the deficiency has the right to pursue that borrower after the property is sold. Banks in Nevada have 6 months to file suit for a deficiency judgment after foreclosure or in the case of a short sale in which the deficiency rights have been retained. For loans generated after Oct 1 2009, banks will not have the ability to pursue a deficiency, if the home was purchased and occupied as a personal residence. Don’t despair homeowners, in many cases, a good REALTOR® can frequently get that deficiency waived for you, even if state law does not automatically protect you.
Getting a deficiency judgment is not a simple matter for the banks. They actually have to take you to court and win a lawsuit against you. This must also be accomplished within a very limited time frame. Remember all of those hastily written mortgages that were bought and sold over and over during the real estate boom?
Paul Rowe lists and sells shorts sales for Shelter Realty. He can be reached at 702-376-7379. You may also email him at paul @ shelterrealty.com.