If your Connecticut home sells at a foreclosure sale for less than you owe on your mortgage loan, you might get stuck with a large bill afterward in the form of a deficiency judgment. In this article, you’ll learn what a deficiency judgment is, how the foreclosing bank can get a deficiency judgment against you in Connecticut, what happens to the deficiency in a short sale or a deed in lieu of foreclosure, and more.
In a foreclosure, the total debt that the borrower owes sometimes exceeds the foreclosure sale price. The difference between the total debt and the sale price is called a “deficiency.”
Example. Say the total amount you owe on your mortgage loan—including outstanding principal, interest, fees, and costs—is $600,000. But your home sells for just $550,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the foreclosing bank can seek a personal judgment, called a “deficiency judgment,” against the debtor to recover the deficiency. Depending on state law, once the bank gets a deficiency judgment, it may generally collect this amount—in our example, $50,000—through conventional collection methods, like garnishing wages or levying a bank account.
Foreclosures in Connecticut are judicial, which means the bank has to go through state court to foreclose. Under Connecticut law, the foreclosure may be a strict foreclosure or a foreclosure by sale. Both kinds of foreclosure go through court.
In Connecticut, the foreclosing bank may obtain a deficiency judgment in either a strict foreclosure or foreclosure by sale
In a strict foreclosure, the bank may seek a deficiency judgment against the borrower within 30 days after the expiration of the redemption period. The deficiency judgment is limited to the difference between the total debt minus the fair market value of the property, as determined by the judge. (Conn. Gen. Stat. § 49-14).
If the property sells for less than the home's appraised value, the bank must first credit the borrower with one-half the difference between the selling price and the appraised value. (Conn Gen. Stat. § 49-28).
Example. Continuing with our example above, the borrower owes $600,000 on the mortgage, but the home sold for $550,000 at the foreclosure sale, which leaves a $50,000 deficiency. The appraised value of the property is $580,000. The difference between the appraised value and the foreclosure sale price is $30,000. Because the property sold for less than the appraised value, divide $30,000 in half to get $15,000, and deduct that amount from $50,000 to come up with the amount that the bank is entitled to receive. In this example, the deficiency judgment would be $35,000.
A short sale is when you sell your home for less than your total mortgage debt, and the proceeds of the sale pay off a portion of the balance. In Connecticut, the bank can get a deficiency judgment after a short sale.
To avoid a deficiency judgment, a short sale agreement must expressly state that the bank waives its right to the deficiency. If the short sale agreement doesn’t contain this waiver, the bank may file a lawsuit to get a deficiency judgment. Though, if the bank forgives the deficiency, you might face tax consequences.
A deed in lieu of foreclosure (deed in lieu) is when a bank agrees to accept a deed to the property instead of foreclosing to get the property’s title. With a deed in lieu, the deficiency amount is the difference between the total debt and the fair market value of the property.
Often, a deed in lieu is deemed to satisfy the debt fully. But Connecticut doesn’t have a law that says the bank can't get a deficiency judgment following this kind of transaction. So, a bank might try to hold you liable for a deficiency following a deed in lieu. To avoid a deficiency judgment, the agreement must expressly state that the transaction completely satisfies the debt. If the deed in lieu contract doesn’t contain this provision, the bank may file a lawsuit to obtain a deficiency judgment. Again, if the debt is forgiven, you might have a tax liability.
If you’re facing a foreclosure and possible deficiency judgment in Connecticut, consider talking to a foreclosure lawyer. A lawyer can tell you about different options, including loss mitigation options, and whether you have any defenses to the foreclosure. For information about alternatives to foreclosure, a HUD-approved housing counselor is also an excellent resource.
Also, the Connecticut Housing Finance Authority (CHFA) helps homeowners in Connecticut avoid foreclosure by providing financial counseling, mortgage assistance loans, and job training. To learn more about programs the CHFA offers to homeowners trying to avoid a foreclosure, get information about eligibility requirements, and find out how the programs might be able to help you, see Avoid a Connecticut Foreclosure: Getting Help From CHFA.