Mortgage Foreclosed? You Might Still Owe Money

Foreclosure doesn’t always wipe out a mortgage debt

With housing markets across the county in shambles, millions of homeowners are sitting on real estate that’s worth less than they owe on it. Many of those people are also having trouble making their monthly mortgage payments, and some of them are losing their homes as a result.

Whether your mortgage lender forecloses on your property, whether you voluntarily surrender it, or whether your lender agrees to a short sale — losing your home is never pleasant. Even so, most people who have to surrender their real estate heave a sigh of relief at finally being freed of an impossible financial burden. Sadly, what many of them don’t realize is that they may still be liable for the unpaid portion of the mortgage debt.

Many homeowners are underwater

We used to think of foreclosure as something that only happened to other people. Then, as the sub-prime mortgage crisis gathered steam, thousands of homeowners who had borrowed more than they could afford to pay — thanks to lenient lenders or exaggerated incomes — had to surrender the property one way or another.

With real estate prices having fallen so drastically in many areas, a huge number of homeowners who bought houses they could afford at the time, and who always made their payments on time, are in trouble as well. Some have lost their jobs, had to relocate for work, or filed for divorce, and now they can’t sell the house for enough to pay off the mortgage. When you owe more on your mortgage than your home is worth, it’s known as being “underwater” on the mortgage.

Each state has different laws

In more than 30 states, lenders can sue to recover the deficiency on a mortgage debt once the property has been sold. New York, Texas, and Florida are among the states that allow lenders to pursue deficiency judgments after a foreclosure or short sale. California is one of the states that don’t allow deficiency judgments; but even there deficiency judgments can sometimes be obtained on refinance or second mortgages.

Deficiency judgments can be obtained long after the fact

Many people who are facing foreclosure now don’t realize that the lender won’t necessarily act immediately to recover a deficiency on the mortgage. Sometimes mortgage holders wait until real estate prices start to rise, sell the house, and then (based on the assumption that your financial situation will have improved right along with the housing market) pursue you for the difference, with interest. In Florida, for example, a bank may wait five years before bringing suit to collect a deficiency and can renew a deficiency judgment for up to 20 years.

Negotiate a legal release

It’s important to know your legal rights if you have to give up your home, so get legal advice from an experienced attorney in your area. An attorney may be able to negotiate a release from your obligation to compensate the lender for a deficiency in the event of a foreclosure or short sale. If you get proper legal advice and assistance, and you’ll know where you stand and can make a new start without the threat of a deficiency judgment.

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