If your Virginia home sells at a foreclosure sale for less than you owe on your mortgage loan, you might get stuck with a substantial bill afterward in the form of a deficiency judgment. In this article, you’ll learn what a deficiency judgment is, how the bank can get a deficiency judgment against you in Virginia, 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 $600,000. But your home sells for just $550,000 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. Depending on state law, once the bank gets a deficiency judgment, the bank may generally collect this amount—in our example, $50,000—through conventional collection methods, like garnishing wages or levying a bank account.
In Virginia, the bank can get a deficiency judgment against the borrower following a nonjudicial foreclosure by filing a lawsuit. (Va. Code Ann. § 8.01-241). Deficiency judgments are also permitted in judicial foreclosures.
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 Virginia, 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 Virginia 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 Virginia, consider talking to a foreclosure lawyer. A lawyer can inform you about any potential defenses to the foreclosure and answer your questions about the process. If you need more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.