Deficiency Judgments After Foreclosure in Texas

Can your lender get a deficiency judgment against you after a foreclosure in Texas?

By , Attorney

If you go through a foreclosure in Texas, the foreclosure sale could result in a deficiency. (When the foreclosure sale price doesn't cover the balance of the borrower's mortgage debt, the difference between the total debt and the sale price is called a "deficiency.")

In some states, like Texas, if a foreclosure sale results in a deficiency, the lender generally may get a deficiency judgment against the borrower for the deficiency amount, but not if the loan is an equity loan.

How Foreclosure Sales Work

If you default on your mortgage loan, the lender can go through a specific legal process called "foreclosure" to sell your home to repay the outstanding debt. After the lender fulfills all of the legal requirements for foreclosure, the final step in a judicial or nonjudicial foreclosure is the foreclosure sale, where the home is sold to a new owner at a public auction.

The foreclosing lender submits the first bid at the sale, which is a "credit bid." With a credit bid, the lender gets a credit in the amount of the borrower's debt. The lender can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less. Most of the time, the lender makes the highest bid at the sale and becomes the new owner of the property because no one else bids. If the lender buys the property at the sale and gets title to the home, the property is considered "real estate owned" (REO).

Lenders regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales.

What Is a "Deficiency Judgment" After a Foreclosure Sale?

When the lender gains ownership of a property through the foreclosure process, and if state law allows it, the lender can seek a personal judgment against the borrower to recover the deficiency, if there is one. This kind of money judgment is called a "deficiency judgment." In some states, the lender may ask for a deficiency judgment as part of a judicial foreclosure process. In other states, the lender has to file a separate lawsuit against the borrower after the foreclosure to get a deficiency judgment.

But if the sale price is equal to, or more than, the mortgage debt amount, you're off the hook because no deficiency exists—even if the lender can't resell the property for the same amount after the foreclosure sale. In fact, if the sale results in excess proceeds, you might be entitled to that extra money following the foreclosure auction. But, if any junior liens were on the home, like a second mortgage or HELOC, or if a creditor recorded a judgment lien against the property, those parties get the funds to satisfy the amount they're owed. Then, any proceeds left over after paying off these liens belong to the foreclosed homeowner.

State Law Sometimes Limits Deficiency Judgments

State law sometimes imposes limits on deficiency judgments. Some states restrict deficiency judgment amounts, such as by requiring that the borrower get credit for the home's fair market value if the foreclosure sale price is less. That is, the property's fair market value is substituted for the foreclosure sale price when calculating the deficiency amount.

Other states limit set time limits for how long lenders get to seek a deficiency judgment against a borrower, typically ranging from three months to one year after the foreclosure sale. (To find out the time limit in your state, talk to a foreclosure lawyer.) Also, various states require specific procedural requirements to get a deficiency judgment, while some states don't allow deficiency judgments in certain circumstances, like after nonjudicial foreclosures.

How Lenders Collect Deficiency Judgments

Generally, once a lender gets a deficiency judgment, it may collect this amount (in the example above, $50,000) from the borrower using regular collection methods, like garnishing wages or levying a bank account.

Even if your lender gets a deficiency judgment, you can probably eliminate your liability for a deficiency judgment, like many other dischargeable debts, in a Chapter 7 or Chapter 13 bankruptcy.

Will My Lender Sue Me for a Deficiency Judgment?

Even if your lender has the right under state law to go after you for a deficiency judgment, it might decide not to do so—especially if you don't have many assets to satisfy the judgment. The lender might decide it isn't worth the expense and effort of getting a deficiency judgment.

Still, you should know whether your lender can potentially pursue you for a deficiency after a foreclosure. Also, even if the lender decides not to sue you for a deficiency judgment, it could later sell the debt to a debt buyer who might file a lawsuit against you for the deficiency later on.

Deficiency Judgments and Texas Foreclosures

Texas has three different foreclosure processes: judicial, nonjudicial, and quasi-judicial.

Deficiency Judgments are Allowed in Judicial and Nonjudicial Foreclosures

Most foreclosures in Texas are nonjudicial, which means the lender can foreclose without going to court if the loan contract (typically a deed of trust) contains a power of sale clause. But if the contract doesn't have a power of sale clause, or sometimes under other circumstances, the lender will use a judicial foreclosure process.

In Texas, with both judicial and nonjudicial foreclosures, the lender may obtain a deficiency judgment. (Tex. Prop. Code § 51.003, § 51.004).

Statute of Limitations After a Nonjudicial Foreclosure

For nonjudicial foreclosures, the lender must file a lawsuit to obtain the deficiency judgment within two years after the foreclosure sale. (Tex. Prop. Code § 51.003).

Fair Market Value Offset

Texas law allows the borrower to get credit for the property's fair market value. To convince the court of the fair market value, you must provide evidence such as expert opinion testimony (like from an appraiser) or comparable sales information. (Tex. Prop. Code § 51.003, § 51.004). To receive the offset, you must request a review of the fair market value:

  • by responding to the lender's deficiency judgment lawsuit that follows a nonjudicial foreclosure, or
  • by filing your own lawsuit within 90 days after the date of a judicial foreclosure sale. (Tex. Prop. Code § 51.003, § 51.004).

Deficiency Judgments Are Not Allowed for Equity Loans

In Texas, a quasi-judicial process is used to foreclose equity loans, like a home equity loan or home equity line of credit. The lender basically must get a court order approving the foreclosure before conducting a nonjudicial foreclosure. (Texas Rule of Civil Procedure 735).

Texas law doesn't allow a deficiency judgment following the foreclosure of an equity loan. (Texas Constitution, Article XVI, § 50(a)(6)(C)).

Getting Foreclosure Help in Texas

If you have questions about Texas's foreclosure process or want to learn about potential defenses to a foreclosure and possibly fight the foreclosure in court, consider talking to a foreclosure attorney.

It's also a good idea to talk to a HUD-approved housing counselor if you want to learn about different loss mitigationoptions. You can use the Consumer Financial Protection Bureau's Find a Counselor tool to get a list of HUD-approved housing counseling agencies in your area. You can also call the Homeownership Preservation Foundation (HOPE) Hotline, which is open 24 hours a day, seven days a week, at 888-995-HOPE (4673).

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