In North Carolina, 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, North Carolina law limits 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 North Carolina, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in North Carolina.
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 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 wages or levying the borrowers’ bank account. In North Carolina, however, judgment creditors cannot collect through wage garnishment. (Read about the rules for wage garnishment in North Carolina.)
(To learn more about deficiency judgments in the foreclosure context, see our Deficiency Judgments After Foreclosure area.)
North Carolina Deficiency Judgments
In North Carolina, foreclosures can be conducted either judicially or nonjudicially. Most foreclosures in the state 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?
Deficiencies Allowed After Most Foreclosures
In North Carolina, a lender may obtain a deficiency judgment following foreclosure. However, there is an exception to this general rule. The lender cannot get a deficiency judgment if:
- the lender used a nonjudicial foreclosure process, and
- the mortgage was a purchase money mortgage (also known as seller-financed mortgages) (N.C. Gen. Stat. § 45-21.38).
Sale Price vs. Fair Market Value of the Property
If the lender purchased the home at the foreclosure sale and the sale price was less than the fair market value of the home, the borrower can challenge the deficiency amount. If the borrower can show that the fair market value of the property is more than the sale price, then the borrower is only liable for the difference between the fair market value and the total debt. (N.C. Gen. Stat. § 45-21.36).
Example. Say the borrower owed $600,000 to the bank. If the bank bought the home at foreclosure for $500,000, but the borrower proves that the fair market value of the home was $550,000. The deficiency will be reduced to $50,000 ($600,000 - $550,000) from $100,000.
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?
When Deficiency Judgments Are Not Allowed
In a few situations in North Carolina, the lender might be barred from seeking a deficiency judgment after foreclosure. This happens if:
- your mortgage is nontraditional, meaning it allows you to defer payment of principal or interest and provides for negative amortization (for example, Pick-a-Payment or Option ARM loans) or is a rate spread home loan (where the annual percentage rate exceeds a certain threshold), and
- the mortgage secures your principal residence. (N.C. Gen. Stat. § 45-21.38A).
Check the law or talk to a local foreclosure attorney for more information.
Deficiency After a Short Sale in North Carolina
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 North Carolina 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.
Deficiency After a Deed in Lieu of Foreclosure in North Carolina
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 North Carolina 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.
North Carolina State Law on Deficiency Judgments
The statutes governing foreclosures can be found in §§ 45-21.1 to 45-21.38 of the North Carolina General Statues which can be accessed on the North Carolina General Assembly webpage at www.ncga.state.nc.us/gascripts/statutes/statutes.asp.