With most Texas foreclosures, you may owe your mortgage lender money after the foreclosure sale if the sale amount is not enough to cover your mortgage balance. But if the foreclosure is on a home equity loan, you're not on the hook for a deficiency (when the mortgage balance exceeds the sale price). Read on to learn what a deficiency judgment is, when your lender can collect one against you in Texas, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
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. (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.)
Texas has three different foreclosure processes: judicial, nonjudicial, and quasi-judicial. (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?)
Most foreclosures in Texas are nonjudicial, which means the lender can foreclose without going to court so long as the mortgage contains a power of sale clause. (A “power of sale clause” is a paragraph in the mortgage that authorizes the nonjudicial foreclosure sale.) However, if there is not a power of sale clause in the mortgage, lenders will use a judicial foreclosure process in which the foreclosure must go through the state court system.
In Texas, the lender may obtain a deficiency judgment after a nonjudicial or judicial foreclosure. (Tex. Prop. Code §51.003, §51.004).
Deadline for the lender to obtain a deficiency judgment. For nonjudicial foreclosures, the lender must file a lawsuit to obtain the deficiency judgment within two years after the foreclosure sale (Tex. Prop. Code §51.003).
Texas state law allows the borrower to receive credit for the fair market value of the property. This means the borrower is entitled to an offset in the deficiency amount if the fair market value of the property is greater than the foreclosure sale price.
Example. Let’s continue the example above where the total debt owed is $200,000, but the home only sells for $150,000, and the deficiency is $50,000. If the borrower submits evidence that the actual property value was higher, let’s say $175,000, and the court agrees, then the deficiency judgment would be reduced to $25,000, rather than $50,000.
In order to convince the court of the fair market value, you must provide evidence such as expert opinion testimony (such as from an appraiser) or comparable sales information (Tex. Prop. Code §51.003, §51.004).
Deadline for the borrower to request an offset. To receive the offset, you must request a review of the fair market value:
In Texas, a quasi-judicial process is used to foreclose on home equity loans. The lender must obtain a court order approving the foreclosure prior to conducting a nonjudicial foreclosure. (Texas Rule of Civil Procedure 735.)
Texas law does not allow deficiency judgments following the foreclosure of a home equity loan. (Texas Constitution, Article XVI, § 50[a][C].)
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 Texas 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 Texas 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.