Generally, if you give the bank a deed-in-lieu of foreclosure or the bank agrees to a “short sale” (where the bank receives less in sales proceeds than you owe on the mortgage loan), the bank will have a right to pursue you for the deficiency. The deficiency is the amount by which the sales proceeds fall short of the mortgage balance. There are a few states (such as California) that have “anti-deficiency” laws, meaning that the bank cannot sue you after they have foreclosed a mortgage loan. But in most states, the bank has the right to collect the full balance of the mortgage loan from you, even after you no longer own the house. However, the bank has to sue you in court to collect this balance, and often, a bank won’t do this if the borrower has no assets or few assets. If you have liquid assets though, and the bank knows this, they might sue you to collect the balance.
Borrowers in non-recourse states have better luck with deed-in-lieu arrangements or short sales because lenders cannot sue them for deficiencies. This means that if your property fetches less in a foreclosure or short sale than the balance of the loan, you cannot be sued for the difference. The specific laws governing the process can be complicated and may differ by type of loan, but according to the Federal Reserve Bank of Richmond, Alaska, Arizona, California, Iowa, Minnesota, Montana, North Carolina, North Dakota, Oregon, Washington, and Wisconsin can be considered non-recourse states.
For the rest of us, deficiency can be a threat. You may be asked to sign a promissory note before a short sale can go through, or you may be required to assume liability for a deficiency when you tender a deed-in-lieu of foreclosure. You won’t know that your lender has opted to let you go without paying until you get a waiver from it or until you get a 1099-C for the forgiven balance. That reports the lender’s loss to the IRS; at that point the bank is saying that it has written off your deficiency and you are in the clear. IF YOU ARE IN A STATE THAT PERMITS RECOURSE, CONSIDER HAVING AN ATTORNEY NEGOTIATE THE TERMS OF A DEED-IN-LIEU OR SHORT SALE FOR YOU. You don’t want to be hit with an unexpected judgment after giving up your home when you could have negotiated some sort of compromise.
In a recent seminar for real estate agents and title personnel, speakers from the loss mitigation department of a large national bank indicated that they decide to pursue deficiency based on several factors.
1. Was the loan a purchase money loan, or was it a cash-out refinance or second mortgage? In most cases, purchase-money borrowers who had to default are treated more gently than those who took cash out for boats, vacations, or to play the stock market. One exception is that those who took cash out for home improvements are treated the same way as purchase money borrowers.
2. Was a true hardship involved, or are you strategically defaulting? Strategic defaulters — those who can afford their mortgage payments but choose to walk away because their home’s value has dropped — will not be offered any mercy from lenders and are being pursued vigorously as a matter of policy.
3. Was the loan taken out recently? The longer you have paid on your mortgage before defaulting, the more likely the lender is to cut you some slack re:deficiency. But if you just got a line of credit and maxed it out, expect little sympathy.
4. What is your financial position? Lenders will pull your credit history, and if you have big car loans and credit card balances, and you’re making those payments, the lender will find it hard to believe that you can’t pay your mortgage. In addition, the lender will get your tax returns. If you had interest income from large bank accounts or capital gains from big stock sales, you will be expected to share the wealth.
If you have a true hardship, and your lender insists on pursuing a deficiency judgment (many times a mortgage servicer is acting on instruction from an investor and has no discretion in the matter), you can shield yourself from it by filing for bankruptcy protection. Why would you do this? Because if you have a true hardship, your credit is likely already trashed, you won’t have assets that can be seized, and this may be your only way out. Understand though that most lenders will not hound you to your grave if you have no resources. For example, one defaulting homeowner was disabled on the job and received a lump sum of $20,000. Technically, it was an asset, but the lender decided not to pursue this homeowner for a deficiency.
It doesn’t make the news, but many mortgage lenders do choose to be humane.
According to me any bank won’t go for your other assets, if you default in mortgage loan, because first of all bank will use the first security which is your home, but if you have signed any deed or terms & condition document where it is already mentioned that bank can also use your more assets other than your home, then it can be possible that bank will sale your other assets as well.