By signing a mortgage contract, you agree to settle your lender the full amount of the loan no matter your circumstances. If the mortgage business forecloses on the home, it sells the home to offset its losses. In the event your property value decreases and your home is no longer worth what you owe on the loan, your lender will endure a reduction and, sometimes, pursue you to your balance.
Borrowers who owe money to their lenders following their homes are sold and foreclosed owe a”deficiency.” The deficiency is the difference between the debtor’s debt to the creditor and the amount the creditor received from selling the home. A mortgage company’s ability to lawfully pursue the debtor for the mortgage lack is dependent on the details of the first loan contract and the legislation in the debtor’s state of residence.
Before the housing bust from the mid-2000s, lenders rarely sued former homeowners to get mortgage deficiencies following foreclosure. However, as foreclosure rates rose, lenders began applying more pressure on borrowers to make good in their mortgage loanseven when the creditor no longer owned the home. According to”The Buffalo (N.Y.) News,” lenders evaluate a borrower’s ability to pay when deciding whether to file a lawsuit against him to get his mortgage lack. Therefore, people facing a true financial hardship are more likely to escape a lack lawsuit than individuals who command an income.
Borrowers living in non-recourse states receive some protection from lack lawsuits following foreclosure. California State Civil Code, for example, dictates that mortgage lenders can’t legally pursue a mortgage shortage unless they utilize judicial foreclosure to seize the property. Given that judicial foreclosure is a much longer process than nonjudicial foreclosure, and the huge majority of California lenders opt for nonjudicial foreclosure–leaving taxpayers protected from paying any deficiencies left in their loans.
Although a primary mortgage lender’s ability to come after an individual following a foreclosure depends directly on the type of loan that the borrower needed and the laws in her state of residence, second mortgage lenders can always file a lawsuit following foreclosure. Lien priority order dictates that, after foreclosure, the principal lender receives payment first. Other lien holders get payment only in the event there is surplus money left over following the original mortgage loan is paid off. Second mortgage lenders, consequently, must often sue the debtor to obtain payment.
A lawsuit to get a mortgage lack not only makes the debtor’s other assets subject to seizure by the mortgage business, but also the judgment looks on his credit report. Judgments are negative entrances and The Fair Credit Reporting Act dictates that credit bureaus may report them for seven years or the statute of limitations for judgment enforcement in the debtor’s state, whichever period is longer. Along with credit damage, many states allow lenders to garnish an individual’s paychecks and bank account following a lawsuit until the deficiency is paid in full.