If your New Jersey home sells at a foreclosure sale for less than you owe on your mortgage loan, you might be on the hook to pay a deficiency judgment.
Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in New Jersey, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
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 $400,000. But your home sells for just $350,000 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 against you, it may collect this amount—in our example, $50,000—through conventional collection methods, like garnishing your wages or levying your bank account.
Foreclosures in New Jersey are judicial, which means the lender has to go through state court. (Some other states permit nonjudicial foreclosures, which means the foreclosure happens without court involvement.)
To get a deficiency judgment after a New Jersey foreclosure, the lender must file a separate lawsuit within three months from the foreclosure sale date or, if confirmation of the sale is required, from the date of the confirmation of the sale. (N.J. Stat. Ann. §§ 2A:50-1 through 2A:50-2.1). This three-month period basically acts as a statute of limitations. If the lender doesn’t file within this period, you have a defense to the deficiency suit.
The borrower may dispute the amount of the deficiency by answering the lender’s suit and introducing evidence regarding the property’s fair market value. The court will then determine the fair market value and limit the deficiency judgment to the difference between the debt and the value as of the date of the foreclosure sale. (Or, the parties may agree to hire three appraisers, and the court will accept their determination about the home's fair market value.) (N.J. Stat. Ann. § 2A:50-3).
However, there’s a downside to filing an answer to dispute the amount of the deficiency: Generally, if the lender gets a deficiency judgment, you get six months after the judgment to bring an action to redeem the property. But if you dispute the amount of the deficiency, you lose this right of redemption. (N.J. Stat. Ann. § 2A:50-4, N.J. Stat. Ann. § 2A:50-5).
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.
In New Jersey, a lender can get a deficiency judgment following a short sale. To avoid a deficiency judgment entirely, a short sale agreement must expressly state that the lender waives its right to the deficiency. If the short sale agreement doesn’t contain this waiver, the lender may file a lawsuit to get a deficiency judgment. Though, if the lender forgives the deficiency, you might face tax consequences.
A deed in lieu of foreclosure (deed in lieu) is when a lender 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 home.
In New Jersey, a lender can get a deficiency judgment following a deed in lieu. To avoid a deficiency judgment with a deed in lieu, the agreement must expressly state that the transaction completely satisfies the debt. If the deed in lieu agreement doesn't contain this provision, the lender may file a lawsuit to obtain a deficiency judgment against you. Again, if the lender forgives all or some of the debt, you might have a tax liability.
If you’re facing a New Jersey foreclosure, consider talking to a foreclosure lawyer. A lawyer might be able to successfully fight a deficiency judgment in court, negotiate a settlement to lower the deficiency, or help you avoid a deficiency judgment by arranging a loss mitigation option that fully satisfies your mortgage debt.