If your Pennsylvania home sells at a foreclosure sale for less than you owe on your mortgage loan, you might get stuck with a hefty bill afterward in the form of a deficiency judgment. But if the foreclosing bank is the buyer at the foreclosure sale, the amount of the deficiency can be limited.
In this article, you'll learn what a deficiency judgment is, how the foreclosing bank can get a deficiency judgment against you in Pennsylvania, what happens to the deficiency in a short sale or a deed in lieu of foreclosure, and more.
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. (Learn about different ways that creditors use to collect judgments.)
Foreclosures in Pennsylvania 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.
To begin the foreclosure, the foreclosing bank files a lawsuit against you (the borrower) and, if you don't file an answer that raises a legitimate defense, obtains a judgment. If the court grants a foreclosure judgment, your home will be sold at a foreclosure sale.
In Pennsylvania, the foreclosing bank may obtain a deficiency judgment in a separate action filed within six months of the transfer of the deed to the new owner after the sheriff's sale. (42 Pa.C.S. § 5522).
If the bank 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 your total debt is $400,000, and the bank bids $350,000 at the foreclosure sale and purchases your property using a credit bid. The deficiency is $50,000. Generally, this means the bank could file a subsequent action where it would be granted a deficiency judgment for $50,000 and be able to collect that amount from you. But if the fair market value of the property is $375,000, the bank could obtain a deficiency judgment for just $25,000.
When the bank 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 decide the fair market value. (42 Pa. Con. St. Ann. § 8103(c)).
A short sale is when you sell your home for less than your total mortgage debt, and the proceeds of the sale pay off a portion of the balance. In Pennsylvania, the bank can get a deficiency judgment after a short sale.
To avoid a deficiency judgment, 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 property.
Often, a deed in lieu is deemed to satisfy the debt fully. But Pennsylvania 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 you liable for a deficiency following a deed in lieu. To avoid a deficiency judgment, the agreement must expressly state that the transaction completely satisfies the debt. If the deed in lieu contract doesn't contain this provision, the bank may file a lawsuit to obtain a deficiency judgment. Again, if the debt is forgiven, you might have a tax liability.
If you're facing a foreclosure and possible deficiency judgment in Pennsylvania, consider talking to a foreclosure lawyer. A lawyer can tell you about different options, including loss mitigation options, and whether you have any defenses to the foreclosure. If you're thinking about filing an answer to a petition for a deficiency judgment, a lawyer can help you with that, too.
For information about alternatives to foreclosure, a HUD-approved housing counselor is also an excellent resource.