In Washington, if the foreclosure sale price is less than the amount you owe on the mortgage, the foreclosing lender cannot come after you for the difference (called the "deficiency") after a nonjudicial foreclosure. However, deficiency judgments are allowed with judicial foreclosures and lenders on second mortgages and HELOCs may be able to sue you in some circumstances.
Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in Washington, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Washington.
(For more articles on foreclosure in Washington, visit our Washington Foreclosure Law Center.)
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. 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 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.)
Most residential foreclosures in Washington are nonjudicial, which means the lender does not have to go through state court to get one. (Sometimes Washington foreclosures are judicial and go 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?)
Learn more about the Washington foreclosure process.
Deficiency judgments are not allowed after nonjudicial foreclosures. In Washington, deficiency judgments are not allowed following nonjudicial foreclosures (Wash. Rev. Code § 61.24.100).
Deficiency judgments are allowed in judicial foreclosures. If the lender pursues a judicial foreclosure, a deficiency judgment is permitted (Wash. Rev. Code § 61.12.070). The court may set a minimum bid price or conduct a hearing to establish the fair market value of the foreclosed property. The deficiency judgment is then limited to the lesser of the difference between:
However, if the court finds that the borrower has abandoned the property for six months or more, then the purchaser at the sheriff's sale takes title to the property free from all redemption rights, and the lender can't get a deficiency judgment (Wash. Rev. Code § 61.12.094)
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.)
In Washington, a lender can 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.)
Washington case law states a lender may not obtain a deficiency judgment after a deed in lieu of foreclosure. InThompson v. Smith, 58 Wn. App. 361 (1990), the court ruled that because the deed in lieu of foreclosure was essentially a nonjudicial foreclosure, the borrower was entitled to protection under Washington’s anti-deficiency laws.
To find the Washington statutes, go to the Washington State Legislature’s webpage at http://apps.leg.wa.gov/rcw. The foreclosure statutes can be found in Title 61.