If your home in Texas sells at a foreclosure sale for less than you owe on your mortgage loan, you might be on the hook to pay more money. That's because, in most cases, Texas law allows the foreclosing bank to get a deficiency judgment for the difference between the sale price and the borrower's total debt.
In this article, you'll learn what a deficiency judgment is, when the bank can get a deficiency judgment against you in Texas, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure.
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 home 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.
Generally, once the bank gets a deficiency judgment against you, the bank may collect this amount—in our example, $50,000—through conventional collection methods, like garnishing your wages or levying your bank account. (Learn about different ways that creditors use to collect judgments.)
Texas has three different foreclosure processes: judicial, nonjudicial, and quasi-judicial. (To learn more about how Texas foreclosures work, read Texas Foreclosure Laws and Procedures.)
Most foreclosures in Texas are nonjudicial, which means the bank 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 bank will use a judicial foreclosure process.
In Texas, with both judicial and nonjudicial foreclosures, the bank may obtain a deficiency judgment. (Tex. Prop. Code § 51.003, § 51.004).
For nonjudicial foreclosures, the bank must file a lawsuit to obtain the deficiency judgment within two years after the foreclosure sale. (Tex. Prop. Code § 51.003).
Texas law allows the borrower to receive credit for the fair market value of the property. So, the borrower can get an offset in the deficiency amount if the fair market value of the property is greater than the foreclosure sale price.
Example. Let's continue the example above where the total debt owed is $300,000, but the home sells for $250,000, and the deficiency is $50,000. If the borrower submits evidence that the actual property value was higher, let's say $275,000, and the court agrees, then the deficiency judgment would be reduced to $25,000, rather than $50,000.
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:
In Texas, a quasi-judicial process is used to foreclose on equity loans, like a home equity loan or home equity line of credit. Basically, this means that the bank must get a court order approving the foreclosure before conducting a nonjudicial foreclosure. (Texas Rule of Civil Procedure 735).
Texas law does not allow a deficiency judgment following the foreclosure of an equity loan. (Texas Constitution, Article XVI, § 50(a)(6)(C)).
A short sale is when you sell your home for less than the total debt you owe, and the proceeds of the sale pay off a portion of the balance.
In Texas, the bank may get a deficiency judgment after a short sale. To avoid a deficiency judgment entirely, 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 have 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 Texas 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 the borrower liable for a deficiency following a deed in lieu. To avoid a deficiency judgment, the agreement must expressly state that the transaction is in complete satisfaction of 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 Texas, consider talking to a foreclosure lawyer. A lawyer might be able to successfully fight a deficiency judgment in court, negotiate a settlement to lower the deficiency, or help you avoid a deficiency judgment by arranging a loss mitigation option that fully satisfies your mortgage debt.
If you want more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.