In Nevada, if you go through foreclosure and the sale price is not enough to cover the balance of your mortgage, your lender can come after you for the "deficiency." However, there are limits to the amount of the deficiency judgment and in certain circumstances the lender is prohibited from getting a deficiency judgment altogether.
Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in Nevada, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Nevada.
What Is a Deficiency After Foreclosure?
When a lender forecloses on a mortgage, the total debt owed by the borrowers to the lender frequently exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a “deficiency.”
Example. If the total debt owed is $200,000, but the home only sells for $150,000 at the foreclosure sale, the the deficiency is $50,000.
In some states, the lender can seek a personal judgment against the debtor to recover the deficiency. Generally, once the lender gets a deficiency judgment, the lender may collect this amount (in our example, $50,000) from the borrowers by doing such things as garnishing the borrowers’ wages or levying the borrowers’ bank account. (Learn about methods that creditors can use to collect judgments.)
(To learn more about deficiency judgments in the foreclosure context, see our Deficiency Judgments After Foreclosure area.)
Nevada Deficiency Judgments
Most foreclosures in Nevada are nonjudicial, which means the lender does not have to go through state court to get one. (In judicial states, the lender must foreclose through the state court system.) To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?)
Limitation on deficiency judgments. In Nevada, a lender may obtain a deficiency judgment within six months following foreclosure, but the amount of the judgment is limited to the lesser of:
- the difference between the total debt and fair market value of the home, or
- the difference between the total debt and foreclosure sale price (Nev. Rev. Stat. § 40.459).
Court hearing to establish fair market value. Before awarding a deficiency judgment, the court will hold a hearing to receive evidence from the lender and the borrowers concerning the fair market value of the property as of the date of foreclosure sale. The lender must give the borrower notice of the hearing 15 days prior to the hearing. The court will appoint an appraiser to appraise the property if the lender or borrowers make a request at least 10 days before the hearing date (Nev. Rev. Stat. § 40.457).
Some deficiency judgments are prohibited. A deficiency judgment is not allowed when all of the following apply:
- the lender is a financial institution (banks, savings and loan associations, credit unions, and thrift companies are examples of financial institutions)
- the loan is a purchase-money loan that has not been refinanced
- the property is a single-family residence owned by the borrowers at the time of the foreclosure sale
- the borrowers have continuously occupied the property as their principal residence, and
- the loan was obtained on or after October 1, 2009. (Nev. Rev. Stat. § 40.455)
Can Lenders of Second Mortgages, HELOCs, and Other Junior Liens Collect From You?
Generally, when a senior lienholder forecloses, any junior liens (these would include second mortgages and HELOCs, among others) are also foreclosed and those junior lienholders lose their security interest in the real estate. If a junior lienholder has been sold-out in this manner, that junior lienholder can sue you personally on the promissory note. This means that if the equity in your home doesn’t cover second and third mortgages, you may face lawsuits from those lenders to collect the balance of the loans.
Learn more in our article What Happens to Liens and Second Mortgages in Foreclosure?
Deficiency After a Short Sale or a Deed in Lieu of Foreclosure in Nevada
A short sale is when you sell your home for less than the total debt balance remaining on your mortgage and the proceeds of the sale pay off a portion of the mortgage balance. (Learn more about short sales to avoid foreclosure.)
A deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of foreclosing in order to obtain title. With a deed in lieu of foreclosure, the deficiency amount is the difference between the fair market value of the property and the total debt. (Learn more about deeds in lieu of foreclosure.)
According to Nevada state law, the lender cannot seek a deficiency judgment after a short sale or deed in lieu of foreclosure when all of the following apply:
- the lender is a banking or financial institution
- the property is a single-family residence owned by the borrowers at the time of the short sale or deed in lieu of foreclosure
- the borrowers have continuously occupied the property as their principal residence
- the loan is a purchase-money loan
- the agreement does not expressly state that the borrower will still owe the lender a particular amount after the transaction or the lender retains the right to recover a deficiency, and
- the agreement contains a conspicuous statement that the lender has waived the right to seek a deficiency. (Nev. Rev. Stat. § 40.458.)
The legislative goal of this statute was probably to protect certain borrowers from a deficiency judgment following a short sale or a deed in lieu of foreclosure. However, the statute actually makes it difficult for borrowers to claim that the lender gave up its right to a deficiency since the statute requires that the agreement contain a conspicuous waiver. (Often, short sale and deed in lieu of foreclosure agreements do not contain such a waiver.)
The bottom line is that to avoid a deficiency judgment following a short sale or deed in lieu of foreclosure in Nevada, you must ensure that there is a conspicuous waiver of the lender’s right to the deficiency written into the agreement.
Nevada State Law on Deficiency Judgments
The statutes governing Nevada foreclosures can be found in §§ 107.080 to 107.100 and 40.455 to 40.463 of the Nevada Revised Statutes at www.leg.state.nv.us/NRS.