If you go through a foreclosure in Missouri, but the foreclosure sale price doesn't cover your entire debt, the lender might sue you to collect the entire deficiency—even if the sale price is less than the property's fair market value.
Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in Missouri, how much the deficiency judgment will likely be, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
In a foreclosure, the total debt the borrower owes to the lender sometimes 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 (called a "deficiency 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.)
Most residential foreclosures in Missouri are nonjudicial, which means the lender does not have to go through state court to foreclose. On the other hand, Missouri foreclosures can be 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?)
In Missouri, deficiency judgments are allowed following a nonjudicial foreclosure sale if the lender files a separate lawsuit. Deficiency judgments are also permitted in judicial foreclosures.
In Missouri, the amount of the deficiency judgment will generally be the loan balance less the amount paid for the property at the foreclosure sale, even if the sale price is less than the fair market value of the property.
If the borrower believes the foreclosure sale price was inadequate, that borrower can bring an action to void the foreclosure sale. But the sale will only be voided if the sale price was so inadequate as compared to the fair market value that it "shocks the conscience" of the court and is in itself evidence of fraud, a standard which was upheld by the Missouri Supreme Court in the case of First Bank v. Fischer & Frichtel, Inc., 364 SW 3d 216 (Mo. 2012). This standard is a tough burden for a homeowner to overcome. In fact, Missouri's standard for proving a foreclosure sale "shocks the conscience" is one of the strictest in the country. There is more than one instance of a court refusing to set aside a sale where the property sold for only 20-30% of the fair market value.
Interestingly though, while the First Bank decision ultimately upheld the long-standing standard in Missouri regarding deficiency judgment amounts, it left the door open for potentially revisiting the issue of how to measure a deficiency in the state in the future and, with the right facts and circumstances, perhaps even to changing the standard in Missouri at some point down the line.
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 mortgage holder has been sold-out in this manner, that junior mortgage holder 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 balance remaining on your mortgage and the proceeds of the sale pay off a portion of the mortgage balance.
In Missouri, 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. (Though, you might have to pay taxes on the forgiven amount.) If the short sale agreement doesn't 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.
In Missouri, 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. (Keep in mind you might have to pay taxes on the forgiven amount.) If the deed in lieu of foreclosure agreement doesn't contain this provision, the lender may file a lawsuit to obtain a deficiency judgment against you.
To find the Missouri statutes that govern foreclosures, go to the Missouri General Assembly's webpage. Look in Chapter 443, §§ 443.290 through 443.453.
If you're behind in your mortgage payments and want to learn about possible defenses or ways avoid a foreclosure, consider talking to a local lawyer. Also, it's a good idea to consider making an appointment to talk to a HUD-approved housing counselor as well.