If you go through a judicial foreclosure in New Jersey, but the sale price isn't enough to cover the balance of your mortgage, your lender can come after you for the "deficiency" following the foreclosure sale. 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 New Jersey.
When a lender forecloses on a mortgage, the total debt owed by the borrowers 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 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. This kind of judgment is called a "deficiency judgment." 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. (To learn more about deficiency judgments in the foreclosure context, see Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)
Foreclosures in New Jersey are judicial, which means the lender has to go through state court to get one. (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 New Jersey foreclosure procedures.
Deficiency judgments are allowed in New Jersey, but not in the foreclosure action itself. To obtain a deficiency judgment, the lender must file a separate lawsuit within three months after the foreclosure sale 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.)
The court may limit the amount of the deficiency judgment if the borrower disputes it.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 limit the deficiency judgment amount to the difference between the debt and the fair market value as of the date of the foreclosure sale. (N.J. Stat. Ann. § 2A:50-3.)
Losing the right to redeem the home. The homeowner loses the right of redemption by contesting the amount of the deficiency. (N.J. Stat. Ann. § 2A:50-5.) (To get general information about the right of redemption, see Right of Redemption After Foreclosure: Getting Your Home Back. For specific information about the right of redemption in New Jersey, see If I Lose My Home to Foreclosure in New Jersey, Can I Get It Back?)
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 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 New Jersey, 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. If the short sale agreement does not contain this waiver, the lender may file a lawsuit to obtain a deficiency judgment. (Keep in mind that if the lender forgives the deficiency, you might have to pay taxes on the canceled amount. To learn more, see Canceled Mortgage Debt: What Happens at Tax Time?)
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 about whether you should hire a lawyer to help you with a deed in lieu of foreclosure.)
In New Jersey, 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 find the New Jersey statutes, go to the State Legislature’s webpage at www.njleg.state.nj.us. Under the heading “Laws and Constitution,” which can be found on the left of your screen, click “Statutes.” You will then see a list of titles. You will need to look in Title 2A. Alternatively, you may use the search box at the bottom of screen to find the statute you want. For example, if you want to read § 2A:50-1, enter “2A:50-1” in the search box, and then click “search.”