In certain circumstances in Florida, 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 lender can collect one against you in Florida, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure. (To learn what to do, and what not do, if you’re facing a foreclosure, read Foreclosure Do's and Don'ts.)
When a lender forecloses, 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 $300,000, but the home sells for $250,000 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.)
Foreclosures in Florida are judicial, which means the lender has to go through state court to foreclose. (In nonjudicial foreclosures, 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?)
Deficiency judgments are allowed. In Florida, the lender may obtain a deficiency judgment as part of the foreclosure action if the borrower was personally served with the foreclosure complaint. The lender may also file a separate lawsuit against the borrower for a deficiency, unless the court in the foreclosure action has granted or denied a claim for a deficiency judgment. (Fla. Stat. Ann. § 702.06.)
The judge determines the amount of the deficiency judgment. The court has flexibility regarding the amount of the deficiency. (Fla. Stat. Ann. § 45.031(8).) Though, it generally can't exceed the difference between the judgment amount and the fair market value as of the date of sale, particularly (pursuant to Florida statute) if the property is:
Time limit to request a deficiency judgment. Effective July 1, 2013, the period of time in which the lender may seek a deficiency judgment is reduced from five years to one year for residential properties with no more than four dwelling units. (Fla. Stat. Ann. § 95.11.)
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 might face lawsuits from those lenders to collect the balance of the loans. (Learn more in What Happens to Liens and Second Mortgages in Foreclosure?)
A short sale is when you sell your home for less than the total debt you owe and the proceeds of the sale pay off a portion of the balance. (Learn more about short sales to avoid foreclosure.)
There is no Florida law that says a lender can't get a deficiency judgment following a short sale, though if the property is owner-occupied and residential, the deficiency is limited to the difference between the outstanding debt and the fair market value of the property. (Fla. Stat. Ann. § 702.06.)
To avoid a deficiency judgment entirely, 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. Though, if the lender forgives the deficiency, you might face tax consequences.
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.)
Often, a deed in lieu of foreclosure is deemed to fully satisfy the debt. But lenders frequently look for new ways to recoup their losses and Florida does not have a law that says the lender can't get a deficiency judgment following a deed in lieu of foreclosure. This means that a lender might 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. (Again, if the debt is forgiven, you might have a tax liability.)
Effective July 1, 2013, the lender has one year to pursue a deficiency judgment after accepting a deed in lieu of foreclosure. (Fla. Stat. Ann. § 95.11.)
If you’re facing a foreclosure in Florida, consider talking to a foreclosure lawyer. A lawyer might be able to defend you against a deficiency judgment, negotiate a settlement to lower the deficiency, or help you arrange a way to avoid a foreclosure that fully satisfies your mortgage debt.
If you want more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.
For more articles on Florida foreclosure law and assistance for Florida homeowners facing foreclosure, visit our Florida Foreclosure Law Center.