If your Ohio home sells at a foreclosure sale for less than you owe on your mortgage loan, you might get stuck with a bill afterward in the form of a deficiency judgment. In this article, you'll learn what a deficiency judgment is, what the limitations are on deficiency judgments under state law, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure. (To learn what to do, and what not do, if you're facing a foreclosure, read Foreclosure Do's and Don'ts.)
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 $300,000. But your home sells for just $250,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the foreclosing 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, the bank may collect this amount—in our example, $50,000—through conventional collection methods, like garnishing your wages or levying your bank account. (Learn about different ways that creditors use to collect judgments.)
Foreclosures in Ohio are judicial, which means the bank has to go through state court to foreclose. (Some other states permit nonjudicial foreclosures, which means the foreclosure happens without court involvement.)
In Ohio, the bank may obtain a deficiency judgment against the borrower. But that judgment is unenforceable as to any deficiency remaining after two years after the court confirms the sale. (Ohio Rev. Code § 2329.08).
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 requirement limits the amount of the deficiency that's available to the bank.
In some states, the bank can add its attorneys' fees to the total amount the borrower owes, which can increase a deficiency judgment. In Ohio, though, a bank can't collect attorneys' fees incurred in the foreclosure from the borrower.
Ohio follows the “American Rule” regarding the recovery of attorneys' fees. This rule says that the winning party in a civil lawsuit generally can't recover attorneys' fees as a part of the costs of litigation.
Ohio courts have consistently held that a bank 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.
On the other hand, if the borrower reinstates the loan, the bank is allowed to add the attorneys' fees to the borrower's total debt.
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 Ohio, a bank may get a deficiency judgment after 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.
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 property.
Often, a deed in lieu will satisfy the debt fully. But Ohio doesn't have a law that says the bank can't get a deficiency judgment following this kind of transaction. So, a bank might try to hold the borrower liable for a deficiency following a deed in lieu. To avoid a deficiency judgment, the agreement must expressly state that the transaction satisfies the debt fully. If the deed in lieu contract doesn't contain this provision, the bank may file a lawsuit to obtain a deficiency judgment.
If you're facing a foreclosure and possible deficiency judgment in Ohio, consider talking to a foreclosure lawyer. A foreclosure attorney can explain different options that might be available to prevent a foreclosure, including options that might reduce or resolve the deficiency, and can tell you if you have any defenses to the action.
If you want more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.