Missing a mortgage payment can cause several negative consequences -- the lender may assess late fees, call and send you letters demanding payment and report your delinquent account to credit bureaus. However, if you continue missing payments and cannot reach a satisfactory payment agreement, the lender may foreclose on your home. This can severely damage your credit and can make you responsible for any foreclosure deficiency.
Definition
A foreclosure deficiency is the balance of your loan left over after the lender applies proceeds from the sale of your home at a foreclosure auction. It also includes the lender's costs involved in executing the foreclosure and selling the home, such as attorney fees, court costs, appraisal fees and auction fees.
Reason for Deficiency
When a lender executes a foreclosure action, it must do so through the judicial system in most states. This means the lender must file the foreclosure action with the county or district court, which involves hiring an attorney and paying court filing fees. The lender typically sells the home at a public auction to the highest bidder; however, it is not under any obligation to command a selling price high enough to cover your mortgage loan balance and foreclosure costs. In many cases, the winning bid price will be less than your mortgage balance.
Collection of Deficiency
After selling your home at a foreclosure auction, the lender may initially attempt to collect the deficiency by calling and sending demand letters, or by hiring a collection agency to handle these collection tasks. The lender may be willing to negotiate a payment arrangement for the deficiency, which may allow you to pay the deficiency amount in installments.
Deficiency Judgment
If you ignore the lender or collector's efforts to collect a deficiency amount after a foreclosure sale, the lender or collection agency may file a lawsuit against you for the deficiency. In most cases, the court will grant a deficiency judgment to the creditor. A judgment makes you legally liable for the debt, and allows the judgment creditor to take additional action to collect the deficiency amount. In most states, a lender or collector with a valid deficiency judgment can apply for a writ of garnishment, which allows the creditor to take a portion of your wages to pay against the deficiency. The judgment creditor may also garnish your bank account balances and liquidate your personal property, subject to your state's exemptions and limitations.
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