What is a Deficiency Judgment?
A deficiency judgment is a legal order that holds a borrower responsible for the remaining balance on their mortgage after a short sale. When a home sells for less than what is owed on the loan, the lender may attempt to recover the difference from the homeowner.

For example, if you owe $250,000 on your mortgage but the short sale closes at $200,000, there is a $50,000 deficiency. Depending on your state’s laws and your lender’s policies, you might still be responsible for paying this amount unless it is waived in the short sale agreement.

You can read more about the short sale process at resources here. 

Are Deficiency Judgments Allowed in Every State?
Deficiency judgment laws vary by state. Some states, called non-recourse states, prohibit lenders from pursuing borrowers for remaining balances after a short sale. Other states, known as recourse states, allow lenders to seek repayment of the deficiency.

A few key points to know:

Non-recourse states generally prevent lenders from suing for deficiencies, but this often depends on the type of loan.
Recourse states allow lenders to pursue borrowers for the unpaid mortgage balance unless the short sale agreement includes a deficiency waiver.
Some states place restrictions on deficiency judgments, such as limiting the amount a lender can recover.
If you’re unsure about your state’s laws, consulting a real estate attorney can help clarify your rights.

How Can Homeowners Avoid a Deficiency Judgment?
When negotiating a short sale, homeowners should take steps to protect themselves from a future deficiency judgment. Here’s how:

• Request a Deficiency Waiver – Lenders may agree to waive the deficiency balance, but it must be explicitly stated in the short sale approval letter.
• Check State Laws – If you live in a non-recourse state, the lender may not have the right to pursue a deficiency judgment.
• Negotiate with the Lender – In some cases, offering a small lump sum payment may encourage the lender to forgive the remaining balance.
• Consider a Short Sale with Hardship Documentation – Providing proof of financial hardship can increase the chances of a lender waiving the deficiency.
  
  How Does a Deficiency Judgment Affect Credit?
  A deficiency judgment can negatively impact your credit score, making it harder to obtain loans, credit cards, or even rental housing. If a judgment is issued, it may remain on your credit report for seven years or longer, depending on the state.

However, if the lender waives the deficiency, the impact on your credit may be less severe. Working with a short sale specialist can help you navigate these potential risks.

What If a Lender Sues for the Deficiency?
If a lender takes legal action, homeowners have a few options:

• Negotiate a Settlement – Some lenders may accept a reduced payment rather than pursuing full repayment.
• File for Bankruptcy – While not an ideal option, bankruptcy may eliminate the deficiency debt in certain cases.
• Challenge the Lawsuit – If the lender did not follow proper procedures, the lawsuit could be dismissed.
  
  Final Thoughts
  A deficiency judgment is an important factor to consider when pursuing a short sale. While not all homeowners will face one, knowing your rights and options can prevent unexpected financial burdens. Always ensure that the short sale agreement includes a deficiency waiver and consult a professional if needed.

If you’re considering a short sale and want expert guidance, visit our Homeowners Page to learn more about your options.