An “anti-deficiency law” is a state statute prohibiting lenders from suing borrowers for deficiencies. A deficiency is defined as the difference between what is owed on a mortgage and the price that a house is sold for in a foreclosure.
Deficiencies often occur on mortgages for a borrower’s principal residence. Anti-deficiency laws typically do not provide protection for second or third mortgages, home equity lines of credit, or mortgages secured as vacation or investment properties.
Judicial and Nonjudicial States and Foreclosure
Most states allow a lender to go after a borrower for deficiencies.
Judicial foreclosure states are states where foreclosures go through a court system. In most judicial foreclosure states lenders are able to request repayment of the deficiency as part of the foreclosure lawsuit. Some judicial foreclosure states require a lender to file a separate lawsuit in order to recover the deficiency.
Nonjudicial states are states where foreclosures are not required to go through the court. Most nonjudicial foreclosure states require a lender to sue a borrower for the deficiency.
Many states that allow a lender to seek a deficiency cap the amount that a lender is able to recover. This cap is usually the difference between the outstanding loan amount and the house’s fair market value.
If the amount owed on the mortgage is $450,000, the house is sold in a foreclosure sale for $200,000, and the fair market value of the house is $300,000, in a deficiency lawsuit the lender can recover only $150,000 ($450,000 minus $300,000), even though the deficiency was actually $250,000 ($450,000 minus $200,000).
Can You Be Sued for the Deficiency?
Just because your lender has the right to sue for a deficiency doesn’t mean they will. Lawsuits can be costly, and many borrowers losing their homes to foreclosure have little income or assets for the lender to even go after.