In certain circumstances in Ohio, you might owe your mortgage lender money after a foreclosure sale of your home. This is called a deficiency. Read on to learn what a deficiency judgment is, whether your mortgage lender can collect one against you in Ohio, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Ohio.
When a lender forecloses on a mortgage, the total debt owed by the borrower 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 only 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. Generally, once the lender gets a deficiency judgment, the lender may collect this amount (in our example, $50,000) from the borrower by doing such things as garnishing the borrower’s wages or levying the borrower’s bank account. (Learn about methods that creditors can use to collect judgments.)
(To learn more about deficiency judgments in the foreclosure context, see our Deficiency Judgments After Foreclosure area.)
Foreclosures in Ohio are judicial, which means the lender has to go through state court to get one. (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 after a foreclosure, 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 cannot 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 is 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 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?
In some states, the lender can add its attorneys’ fees to the total amount owed by the borrower, which can increase a deficiency judgment. In Ohio, however, a lender cannot collect attorneys’ fees incurred in the foreclosure from the borrower.
The American Rule. Ohio follows the “American Rule” regarding the recovery of attorney fees. This rule says that the winning party in a civil lawsuit may not recover attorney fees as a part of the costs of litigation. The Ohio courts have held that a lender cannot 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 before foreclosure (this happens when the borrower pays the past due amount to bring the account current and stop the foreclosure), 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 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.)
There is no Ohio law that says a lender cannot 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.
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 more about deeds in lieu of foreclosure.)
Usually, a deed in lieu of foreclosure is deemed to fully satisfy the debt. However, lenders frequently look for new ways to recoup their losses and Ohio does not have a law that says the lender cannot get a deficiency judgment following a deed in lieu of foreclosure. This means that a lender may try to hold the borrower liable for a deficiency 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.
The statute governing deficiency judgments can be found in the Ohio Revised Code, Title 23, Chapter 2329, § 2329.08, at the State of Ohio's website at http://codes.ohio.gov./orc.