Deficiency Judgment Laws in Texas

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

By , Attorney · University of Denver Sturm College of Law

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.

What Is a Deficiency in a Foreclosure?

Again, when the foreclosure sale price doesn't cover the borrower's mortgage debt balance, the difference between the total debt and the sale price is called a "deficiency."

Example of a Mortgage Deficiency in a Foreclosure

If you default on your mortgage loan, the lender can go through a legal process called "foreclosure" to sell your home to repay the outstanding debt. After the lender fulfills all 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, a "credit bid." With a credit bid, the lender gets a credit in the amount of the borrower's debt. 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. The lender can bid up to the total amount of the debt, including foreclosure fees and costs, or it might bid less. Lenders regularly bid less than the total amount of a borrower's mortgage debt at foreclosure sales.

Again, the difference between the total debt and a lesser bid is the deficiency. For example, if your total mortgage debt is $500,000, but the home sells to the lender at a foreclosure sale for a credit bid of $450,000, the deficiency is $50,000.

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

If state law allows it, the lender can seek a personal judgment against the borrower to recover the deficiency, if one exists. This kind of money judgment is called a "deficiency judgment."

How Does My Lender Get a Deficiency Judgment Against Me?

In some states, the lender can get a deficiency judgment as part of the judicial foreclosure process. Other states require the lender to file a separate lawsuit against the borrower after the foreclosure for a deficiency judgment.

Does Every Foreclosure Result in a Deficiency Judgment?

If the sale price is equal to or more than the mortgage debt amount, you're off the hook for a deficiency judgment because no deficiency exists. And 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 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.

Are Deficiency Judgments After a Home Foreclosure Allowed in All the States?

Most states allow a foreclosing lender to get a deficiency judgment against a borrower for the deficiency amount. However, some states have anti-deficiency laws that apply in certain circumstances.

Are Deficiency Judgments Allowed Against Defaulted Homeowners in Texas?

Texas law permits deficiency judgments in most cases.

What Are the Legal Requirements for a Deficiency Judgment in Texas?

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

Does Texas Allow Deficiency Judgments 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, the lender may get a deficiency judgment with both judicial and nonjudicial foreclosures. (Tex. Prop. Code § 51.003, § 51.004).

What Is the Statute of Limitations for a Deficiency Judgment After a Nonjudicial Foreclosure in Texas?

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).

Example. Let's continue the example above where the total debt owed is $500,000, but the home sells for $450,000, and the deficiency is $50,000. If the borrower submits evidence that the actual property value was higher, say $475,000, and the court agrees, the deficiency judgment would be reduced to $25,000 rather than $50,000.

Deficiency Judgments Are Not Allowed for Equity Loans in Texas

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 Rules of Civil Procedure, Rule 735).

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

Can You Avoid a Deficiency Judgment in Texas?

If you go through a foreclosure and a court orders you to pay a deficiency judgment, you might be able to use bankruptcy to eliminate the debt. Or you might have a defense to the deficiency.

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 about different loss mitigation options. 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, open 24 hours a day, seven days a week, at 888-995-HOPE (4673).

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