Deficiency Judgment Laws in Minnesota

If you go through a foreclosure in Minnesota, the foreclosure sale could result in a deficiency. When the foreclosure sale price doesn't cover the balance of the borrower's mortgage debt, the difference between the total debt and the sale price is called a "deficiency." For example, if the borrower's total debt is $500,000, but the home sells to the highest bidder at a foreclosure sale for $450,000, the deficiency is $50,000.

In some states, if a foreclosure sale results in a deficiency, the lender may get a "deficiency judgment" against the borrower for the deficiency amount. But Minnesota law usually prevents the lender from pursuing a deficiency judgment against a foreclosed homeowner.

How Foreclosures in Minnesota Result in a Deficiency

If you default on your mortgage loan, the lender can go through a specific legal process called "foreclosure" to sell your home to repay the outstanding debt. After the lender fulfills all of the legal requirements for foreclosure, the final step in a judicial or nonjudicial foreclosure is the foreclosure sale, where the home is sold to a new owner at a public auction.

The foreclosing lender submits the first bid at the sale, which is a "credit bid." With a credit bid, the lender gets a credit in the amount of the borrower's debt. The lender can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less. Most of the time, the lender makes the highest bid at the sale and becomes the new owner of the property because no one else bids. If the lender buys the property at the sale and gets title to the home, the property is considered "real estate owned" (REO).

Lenders regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales, resulting in a deficiency.

What Is a "Deficiency Judgment" After a Foreclosure Sale?

When the lender gains ownership of a property through the foreclosure process, and if state law allows it, the lender can seek a personal judgment against the borrower to recover the deficiency, if there is one. This kind of money judgment is called a "deficiency judgment."

In some states, the lender may ask for a deficiency judgment as part of a judicial foreclosure process. In other states, the lender has to file a separate lawsuit against the borrower after the foreclosure to get a deficiency judgment.

What If the Foreclosure Sale Results in Surplus Funds?

If the sale price is equal to, or more than, the mortgage debt amount, you're off the hook because no deficiency exists—even if the lender can't resell the property for the same amount after the foreclosure sale. In fact, if the sale results in excess proceeds, you might be entitled to that extra money following the foreclosure auction.

Are Deficiency Judgments Allowed After Minnesota Foreclosures?

Most foreclosures in Minnesota are nonjudicial, which means the lender doesn't have to go through state court to foreclose. The lender could alternatively choose to foreclose through the state court system, called a "judicial foreclosure." However, in states where a nonjudicial process is available, lenders almost always choose this route rather than pursuing a judicial foreclosure because an out-of-court foreclosure is relatively quick and inexpensive.

A deficiency judgment isn't allowed in Minnesota if a mortgage is foreclosed nonjudicially and has:

• a six-month redemption period or
• a five-week redemption period (as applicable to some abandoned properties, see below). (Minn. Stat. § 582.30).

How Long You Get to Redeem Your Home After a Minnesota Foreclosure Sale

Under Minnesota law, foreclosed homeowners get a specific amount of time to redeem their property after the sale.

General redemption period. Most homeowners get a six-month redemption period. (Minn. Stat. § 580.23, Subd. 1; § 581.10).

Longer redemption period under certain circumstances. Minnesota homeowners get a 12-month redemption period in some circumstances, like if:

• the amount due as of the date of the filing of the notice of foreclosure sale is less than two-thirds of the original principal amount of the loan
• the mortgaged property is bigger than 40 acres in size, or
• the mortgaged property is between 10 and 40 acres and is in agricultural use. (For parcels in agricultural use, the homeowner may agree to waive the 12-month redemption period. Then, the regular six-month period applies.) (Minn. Stat. § 580.23, Subd. 4; § 581.10).

Reduced redemption period for abandoned homes. If the homeowner abandons (leaves) the home, the redemption period can be reduced to five weeks. To qualify for a reduced redemption period, the abandoned property must be (1) ten acres or less in size, (2) improved with a residential dwelling consisting of less than five units which is neither a model home nor a dwelling under construction, and (3) not property used in agricultural production. (Minn. Stat. § 582.032).

Reduced redemption period if the borrower postpones the sale. If the borrower postpones the sale, a court can reduce the redemption period to five weeks. (Minn. Stat. § 580.07).

Are Deficiency Judgments Permitted in Judicial Foreclosures in Minnesota?

If a lender forecloses judicially, then a deficiency judgment is possible. But because most homeowners in Minnesota are foreclosed nonjudicially and get a six-month or five-week redemption period because of home abandonment, a deficiency judgment usually isn't an issue.

Read More Articles

Get tips on what to do (and what not to do) if you're facing a foreclosure in Foreclosure Do's and Don'ts.

Learn about Last-Minute Strategies to Stop Foreclosure.

Find out if foreclosures are on the rise.

Getting Foreclosure Help in Minnesota

If you have questions about Minnesota's foreclosure process or want to learn about potential defenses to a foreclosure and possibly fight the foreclosure in court, consider talking to a foreclosure attorney.

It's also a good idea to talk to a HUD-approved housing counselor if you want to learn about different loss mitigation options.