If you lose your home to a foreclosure in Virginia and the foreclosure sale price doesn’t cover the entire debt, state law permits the lender to come after you for the "deficiency." Read on to learn what a deficiency judgment is, when your mortgage lender can collect one against you in Virginia, and what happens to the deficiency in a short sale or a deed in lieu of foreclosure in Virginia. (To learn what to do, and what not do, if you’re facing a foreclosure, read Foreclosure Do's and Don'ts.)
When a lender forecloses, the total debt the borrowers owe to the lender frequently exceeds the foreclosure sale price. The difference between the sale price and the total debt is called a deficiency.
Example. Say the total debt owed is $400,000, but the home sells for $350,000 at the foreclosure sale. The deficiency is $50,000.
In some states, the lender can seek a personal judgment against the debtor to recover the deficiency. Generally, once the lender gets a deficiency judgment, the lender may collect this amount (in our example, $50,000) from the borrowers by doing such things as garnishing the borrowers’ wages or levying the borrowers’ bank account. (Learn about methods that creditors can use to collect judgments.)
(To learn more about deficiency judgments in the foreclosure context, see Deficiency Judgments: Will You Still Owe Money After the Foreclosure?)
Most residential foreclosures in Virginia are nonjudicial, which means the lender does not have to go through state court to foreclose. (However, sometimes Virginia foreclosures are judicial and go through the state court system. To learn more about the difference between judicial and nonjudicial foreclosure, and the procedures for each, see Will Your Foreclosure Take Place In or Out of Court?)
In Virginia, deficiency judgments are allowed following the nonjudicial foreclosure sale if the lender files a separate lawsuit. Deficiency judgments are also permitted in judicial foreclosures.
Generally, when a senior lienholder forecloses, any junior liens (these would include second mortgages and HELOCs, among others) are also foreclosed and those junior lienholders lose their security interest in the real estate. If a junior mortgage holder has been sold-out in this manner, that junior mortgage holder can sue you personally on the promissory note. This means that if the equity in your home doesn’t cover second and third mortgages, you may face lawsuits from those lenders to collect the balance of the loans. (Learn more in our article What Happens to Liens and Second Mortgages in Foreclosure?)
A short sale is when you sell your home for less than the total debt balance remaining on your mortgage and the proceeds of the sale pay off a portion of the loan balance. (Learn more about short sales to avoid foreclosure.)
In Virginia, a lender can get a deficiency judgment following a short sale. To avoid a deficiency judgment, the short sale agreement must expressly state that the lender waives its right to the deficiency. If the short sale agreement does not contain this waiver, the lender may file a lawsuit to obtain a deficiency judgment. Though, if the lender forgives the deficiency, you might face tax consequences.
A deed in lieu of foreclosure occurs when a lender agrees to accept a deed to the property instead of obtaining title to the property through foreclosure. With a deed in lieu of foreclosure, the deficiency amount is the difference between the fair market value of the property and the total debt. (Learn more about a deed in lieu of foreclosure.)
In Virginia, a lender can get a deficiency judgment after accepting a deed in lieu of foreclosure. To avoid a deficiency judgment with a deed in lieu of foreclosure, the agreement must expressly state that the transaction fully satisfies the debt. If the deed in lieu of foreclosure agreement does not contain this provision, the lender 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 in Virginia, consider talking to a foreclosure lawyer. A lawyer might be able to defend you against a deficiency judgment, negotiate a settlement to lower the deficiency, or help you arrange a way to avoid a foreclosure that fully satisfies your mortgage debt.
If you want more information about alternatives to foreclosure, a HUD-approved housing counselor is an excellent resource.
For more articles on foreclosure in Virginia, visit our Virginia Foreclosure Law Center.