If your home in New York 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. However, under certain circumstances—like if the foreclosing bank doesn’t go after a deficiency judgment within a specific amount of time following the foreclosure sale—you won’t have to pay the deficiency balance. Also, even in cases where the bank does get a deficiency judgment, the court can limit the amount.
Read on to learn what a deficiency judgment is, when your mortgage bank can collect one against you in New York, 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 $500,000. But your home sells for just $450,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the bank can seek a personal judgment (called a “deficiency judgment”) against the debtor to recover the deficiency. Generally, once the bank 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.
Under New York law, the bank may obtain a deficiency judgment against the borrower—subject to some limitations. (N.Y. Real Prop. Act. Law § 1371).
The bank must ask for a deficiency judgment within 90 days after consummation of the foreclosure sale. (The sale is consummated when the deed is delivered to the purchaser.) This time period effectively acts as a statute of limitations. (N.Y. Real Prop. Act. Law § 1371(2)).
A request for a deficiency judgment is made at the same time the bank files a motion for an order confirming the sale. (N.Y. Real Prop. Act. Law § 1371(2)).
The deficiency is also limited by the fair market value of the property, which the court determines. (N.Y. Real Prop. Act. Law § 1371(2)).
Example: If the total debt is $500,000 and the bank bids $450,000 at the foreclosure sale and purchases the property, the deficiency is $50,000. Generally, this means the bank could get a deficiency judgment for $50,000 and then collect that amount from the borrower. But if the court determines that the fair market value of the property is really $475,000, the bank could get a deficiency judgment in the amount of just $25,000.
So, the amount of the deficiency is the total debt less the higher of the fair market value or the sales price.
A bank may obtain a deficiency judgment only if the complaint is personally served on the borrower or if the borrower enters an appearance in the foreclosure action. (N.Y. Real Prop. Act. Law § 1371(1)).
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.
New York doesn’t have a law that prevents a bank from getting a deficiency judgment following a short sale. To avoid a deficiency judgment entirely, a short sale agreement must expressly state that the bank waives its right to the deficiency. If the short sale agreement doesn’t contain this waiver, the bank may file a lawsuit to get a deficiency judgment. Though, if the bank forgives the deficiency, you might face tax consequences.
A deed in lieu of foreclosure (deed in lieu) is when a bank 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 York, a bank 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 bank may file a lawsuit to obtain a deficiency judgment against you. Again, if the bank forgives all or some of the debt, you might have a tax liability.
If you’re facing a New York foreclosure, consider talking to a foreclosure lawyer. A lawyer might be able to successfully fight a deficiency judgment, 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.
If you want more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.