In certain circumstances in Ohio, you might owe your mortgage lender (or the subsequent owner of your loan) money after a foreclosure sale. This is because, sometimes in a foreclosure, the total debt the borrower owes to the lender exceeds the foreclosure sale price. The difference between the total debt and the sale price is called a “deficiency.” For example, say the total debt the borrower owes is $200,000, but the home sells for $150,000 at the foreclosure sale. The deficiency is $50,000.
In some states, including Ohio, the lender can seek a personal judgment—a deficiency judgment—against the borrower 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 borrower through regular collection methods, like garnishing the borrower’s wages or levying the borrower’s bank account. (To learn more about deficiency judgments, see Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)
Foreclosures in Ohio are judicial, which means the lender has to go through state court to foreclose. (In nonjudicial states, the lender can foreclose without going to court. 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?)
Deficiency judgments are allowed. In Ohio, the lender may obtain a deficiency judgment against the borrower, but that judgment is void two years after confirmation of the sale by the court. (Ohio Rev. Code § 2329.08).
Limitation on deficiency judgments. The property can't be sold at foreclosure sale for less than two-thirds of the appraised fair market value. (Ohio Rev. Code §§ 2329.20, 2329.17). This limits the amount of the deficiency that's available to the lender.
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 lienholder has been sold-out in this manner, that junior lienholder can sue the borrrower personally on the promissory note. This means that if you have more than one mortgage lien on your home, and the equity in the property doesn’t cover a second or third mortgage, you might 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?)
In some states, the lender can add its attorneys’ fees to the total amount the borrower owes, which can increase a deficiency judgment. In Ohio, though, a lender can't collect attorneys’ fees incurred in the foreclosure from the borrower.
The American Rule. Ohio follows the “American Rule” regarding the recovery of attorneys' fees. This rule says that the winning party in a civil lawsuit may not recover attorneys' fees as a part of the costs of litigation. Ohio courts have held that a lender can't get attorneys’ fees in a foreclosure, nor can it collect fees in a payoff (even though mortgage contracts typically include a provision allowing such fees to be collected) because it would be against public policy.
Reinstatement. On the other hand, if the borrower reinstates the loan, the lender is allowed to add the fees to the borrower’s total debt.
A short sale is when you sell your home for less than the total debt remaining on your loan; the proceeds of the sale pay off a portion of the balance. (Learn more about short sales to avoid foreclosure.)
Ohio doesn't have a law prohibiting the lender from getting 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.
A deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of foreclosing. With a deed in lieu of foreclosure, the deficiency is the difference between the fair market value of the property and the total debt. (Learn more about deeds in lieu of foreclosure.)
Usually, a deed in lieu of foreclosure is deemed to fully satisfy the debt. But Ohio doesn't have a law that says the lender can't get a deficiency judgment following a deed in lieu of foreclosure. This means that a lender may sue the borrower for a deficiency judgment after this type of transaction. 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 you need help understanding Ohio's foreclosure laws, want to fight the foreclosure, or have questions about a potential deficiency judgment, consider contacting a local foreclosure attorney.
Homeowners facing foreclosure are also encouraged to contact a HUD-approved housing counselor to discuss various ways to avoid a foreclosure.