Return to Foreclosures

Foreclosure deficiency judgement?

Yes, but it depends.

What do you mean by a ‘deficiency’?

First of all, a deficiency is the difference between what the homeowner owes the lender and what the lender is paid in a Short Sale minus expenses. For example, in this example if the home sells for $100,000 and the mortgage note is for $125,000, and there are $5000 in closing costs and fees to sell the home, then the deficiency is $30,000.

Judicial foreclosure

In Washington State, there are two types of foreclosures, judicial and non-judicial. Most foreclosuresare non-judicial because the mortgage instrument is a deed in lieu. They don’t go into court and have a judge decide the case.

However, in a judicial foreclosure, if the lender chooses to go that route, the homeowner (debtor) has the right to redeem his/her interest in the property for up to one year after the judicial foreclosure sale as long as they did not abandon the property for at least 6 months prior to the foreclosure.

When a lender forecloses judicially, the lender bids the value of the property, less anticipated resale costs and holding costs. If no one outbids the lender, then the lender becomes the successful bidder at the sale.  If the court confirms the sale a judgment is entered against the debtor for the deficiency.

However, that homeowner may come back within one year and redeem, or buy, the home back for the amount of the original debt, legal fees, costs, and other expenses. Lenders don’t usually like to do this because they may have to hold onto the property for a year before they can dispose of it.

Non-judicial foreclosure

non-judicial foreclosure is when a home is foreclosed on and no resolution has been reached by the auction date. The home is then put on the auction block on the County Court House steps. The lender puts a price on the home equal to the debt owed. If it doesn’t sell for more than that amount, then the bank actually is the successful bidder and buys the home for the amount of the debt.

Probably only about 20% of the homes sell at auction. If they don’t sell at auction the lender buys them and now the lender owns the home. When this happens it’s called a non-judicial foreclosure and the debt to the bank by homeowner is forgiven. So a deficiency judgment cannot be entered against the debtor here in Washington if the property goes to auction.

Washington State

In real life. it’s rare for the lender to foreclose judicially because Washington is a redemption state (the owner has the right to redeem his/her interest in the property for up to one year after the judicial foreclosure sale). Also, if the homeowner doesn’t have equity in the property and they do not have other assets the lender can go after, the banks usually don’t attempt to obtain a deficiency judgment.

It’s not to say they won’t try, but it is usually to their advantage to just get the house sold with a Short Sale and write the loss off and move on.

Deficiency 1099

When the lender writes the loss off, they will then issue a 1099 to the homeowner for the amount of the deficiency, $30,000 in our above example. That $30,000 will then be treated as income by the IRS. The Mortgage Forgiveness Debt Relief Act of 2007 was sign into law in 2007 which was intended to “forgive” that debt amount for up to 2 million dollars.

This information is not intended to be, or to provide, any legal advice. It is recommended that you consult an attorney and a tax accountant regarding specifics pertinent to your individual situation.