In certain circumstances in Iowa, you might owe your mortgage lender money after a foreclosure sale of your home. This is called a deficiency. in most cases, lenders can get a deficiency judgment in Iowa. However, there are some instances when the lender cannot get a deficiency, and others when the lender might opt to waive the deficiency.
Read on to learn what a deficiency judgment is, whether your mortgage lender can collect one against you in Iowa, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
(For more articles on Iowa foreclosure law and assistance for Iowa homeowners facing foreclosure, visit our Iowa Foreclosure Law Center.)
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 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.)
Foreclosures in Iowa may be judicial (which means the lender has to go through state court to get one) or nonjudicial (where the lender does not have to go through state court), though most are 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?)
Learn more about foreclosure procedures in Iowa.
Deficiency judgments are generally allowed in Iowa. However, there are certain circumstances where the lender cannot get one or may choose to give up this right.
Nonjudicial voluntary foreclosure. A deficiency judgment is not allowed if the foreclosure is an “alternative nonjudicial voluntary foreclosure.” Iowa law gives homeowners the option of an alternative nonjudicial foreclosure if they voluntarily give up possession and the lender agrees to waive any deficiency. (Iowa Code § 654.18).
Nonjudicial foreclosure of nonagricultural property. A deficiency judgment is not allowed if the foreclosure is an involuntary nonjudicial foreclosure of a nonagricultural mortgage (as governed by Iowa Code § 655A et. seq.). This means the lender cannot get a deficiency after a nonjudicial foreclosure of property that is not used for an agricultural purpose or is an owner-occupied one or two family dwelling.
Redemption period shortened if deficiency waived. In Iowa, the redemption period is one year, but a mortgage document may shorten this to six months if the lender waives the deficiency in the foreclosure action (Iowa Code § 628.26). (Redemption is the right of a foreclosed property owner to reclaim the property by paying the entire sale price, plus certain additional costs and interest following the foreclosure sale. Learn more about redemption periods.)
No redemption period if deficiency waived. The lender may elect to foreclose without redemption and include in the foreclosure petition a waiver of the deficiency judgment (Iowa Code § 654.26).
Other circumstances for primary residences. If the lender chooses to foreclose without redemption, but does not waive the right to a deficiency judgment, and if the borrower does not demand a delay of the sale plus the foreclosed property is a primary residence (one- or two-family dwelling), then the lender is barred from getting a deficiency judgment (Iowa Code § 654.26).
The bottom line is that Iowa law makes it faster to foreclose on a property if the lender waives the right to a deficiency judgment.
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 Iowa, a lender can get a deficiency judgment following a short sale. 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.
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.)
In Iowa, a lender can get a deficiency judgment 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 against you.
To read the statutes that govern foreclosures in Iowa, go to the Iowa Legislature’s webpage at www.legis.iowa.gov and click on “Iowa Code.” Look in Title XV (“Judicial Branch and Judicial Procedures”) to find the relevant statutes.