If you go through a foreclosure in Pennsylvania, but the foreclosure sale price is less than you owe on your mortgage loan, you might have to pay the difference to your lender. (The difference between the total amount you owe and the foreclosure sale price is called a "deficiency.")
Read on to learn about the deficiency laws in Pennsylvania. (To learn what to do—and what not do—if you’re facing a foreclosure, see Foreclosure Do's and Don'ts).
In a foreclosure, the borrower’s total debt sometimes exceeds the foreclosure sale price. Again, the difference between the sale price and the total debt is called a “deficiency.”
Example. Say the total debt owed is $400,000, but the home sells for $350,000 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. (Learn about methods that creditors can use to collect judgments.)
(To learn more about deficiency judgments in the foreclosure context, see Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)
Foreclosures in Pennsylvania are judicial, which means the process goes through state court. (In nonjudicial foreclosures, 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?)
In Pennsylvania, the lender may obtain a deficiency judgment in a separate action after the foreclosure sale.
If the lender is the purchaser at the foreclosure sale, the deficiency is limited by the fair market value of the property. (42 Pa. Con. St. Ann. § 8103(a)).
Example: Say the borrower’s total debt is $400,000 and lender bids $350,000 at the foreclosure sale and purchases the property using a credit bid. The deficiency is $50,000. Generally, this means the lender could file a subsequent action where it would be granted a deficiency judgment for $50,000 and be able to collect that amount from the borrower. But if the fair market value of the property is really $375,000, the lender could obtain a deficiency judgment in the amount of just $25,000.
When the lender files its petition for a deficiency judgment, it will include what it believes is the fair market value of the property. If you disagree with the assessment, you may file an answer to the petition. The court will evaluate the evidence and make a determination regarding the fair market value. (42 Pa. Con. St. Ann. § 8103(c)).
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.
So, if the equity in your home doesn’t cover second and third mortgages, you might face lawsuits from those lenders to collect the balance of the loans. (Learn more in What Happens to Liens and Second Mortgages in Foreclosure?)
A short sale is when you sell your home for less than you owe on your mortgage loan. (Learn more about short sales to avoid foreclosure.)
There is no Pennsylvania law that prevents a 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. (Though, if the lender forgives the deficiency amount and issues you a 1099-C, you might owe taxes on the forgiven amount. To learn more, see Will You Owe Income Taxes on Forgiven Mortgage Debt?)
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 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. But lenders frequently look for new ways to recoup their losses and Pennsylvania does not 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 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. (Again, if the debt is forgiven, you might have tax liability.)
The laws governing deficiency judgments can be found in the Pennsylvania statutes in Title 42, Chapter 81, Section 8103. (To learn how to look up foreclosure laws, see How to Find the Foreclosure Laws in Your State.)
If you’re facing a foreclosure in Pennsylvania, consider talking to a local foreclosure attorney. A foreclosure attorney can explain different options that might be available to prevent a foreclosure, like a loan modification, forbearance agreement, or repayment plan, and let you know if you have any potential defenses to the foreclosure. A lawyer can also help you prepare a response to a petition for a deficiency judgment.
If you can’t afford to hire a lawyer, a HUD-approved housing counselor is a good resource for information about different ways to avoid foreclosure.