In certain circumstances in New York, you might owe your mortgage lender money after a foreclosure sale of your home. This is called a deficiency. Read on to learn what a deficiency judgment is, whether your mortgage lender can collect one against you in New York, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in New York.
When a lender forecloses on a mortgage, the total debt owed by the borrower to the lender frequently exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a “deficiency.”
Example. Say the total debt owed is $200,000, but the home only sells for $150,000 at the foreclosure sale. 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 borrower 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.)
Foreclosures in New York are judicial, which means the lender has to go through state court to get one. (In nonjudicial states, the lender can foreclose without going to court.) 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?)
In New York, the lender may obtain a deficiency judgment against the borrower (N.Y. Real Prop. Act. Law §1371).
The deficiency is limited by the fair market value of the property, which is determined by the court (N.Y. Real Prop. Act. Law §1371).
Example: If the total debt is $200,000 and the lender bids $150,000 at the foreclosure sale and purchases the property, the deficiency is $50,000. Generally, this means the lender could file a lawsuit to get a deficiency judgment for $50,000 and then collect that amount from the borrower. However, if the court determines that the fair market value of the property is really $175,000, the lender could only obtain a deficiency judgment in the amount of $25,000.
So, the amount of the deficiency is the amount of the debt less the higher of:
The lender must submit a request for a deficiency judgment within 90 days after consummation of the foreclosure sale. (The sale is consummated when the deed is delivered to the purchaser.) The request for a deficiency judgment is made simultaneously with the filing of a motion for an order confirming the sale (N.Y. Real Prop. Act. Law §1371).
A lender may only obtain a deficiency judgment if the complaint is personally served on the borrower or if the borrower enters an appearance in the foreclosure action (N.Y. Real Prop. Act. Law §1371).
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?
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.)
There is no New York law that says a lender cannot get a deficiency judgment following a short sale. To avoid a deficiency judgment, the short sale agreement must expressly state that the lender waives its right to the deficiency. If the short sale agreement does not contain this waiver, the lender may file a lawsuit to obtain a deficiency judgment.
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.)
Usually, a deed in lieu of foreclosure is deemed to fully satisfy the debt. However, lenders frequently look for new ways to recoup their losses and New York does not have a law that says the lender cannot get a deficiency judgment following a deed in lieu of foreclosure. This means that a lender may try to hold the borrower liable for a deficiency following a deed in lieu of foreclosure.
To avoid a deficiency judgment with a deed in lieu of foreclosure, the agreement must expressly state that the transaction is in full satisfaction of the debt. If the deed in lieu of foreclosure agreement does not contain this provision, the lender may file a lawsuit to obtain a deficiency judgment.
The statutes governing foreclosures in New York can be found in Real Property Actions and Proceedings, Article 13, § § 1301 to 1391, which can be found by going to http://public.leginfo.state.ny.us and clicking on “Laws of New York.” To learn more about foreclosure in New York, see our Summary of New York's Foreclosure Laws.