Deficiency – What is it and How Much Time Does My Bank Have to Sue?

Originally Published: 3/27/2012

When an underwater home is sold in a short sale or a foreclosure, the greatest concern is almost always over the remaining mortgage balance owed by the homeowner (known as a “deficiency balance”) and how long the lender has to try to collect it.  When a property is sold in short sale, generally speaking, the deficiency is the difference between the total debt owed on the mortgage and the sale price.  In foreclosure, the deficiency is, generally speaking, the difference between the total balance and the fair market value of the property on the date of the foreclosure auction.  Obviously, “fair market value” is a very subjective term in this situation, and banks do everything possible to show the lowest possible fair market value of property after foreclosure in order to maximize the homeowner’s deficiency amount.

One of the best opportunities to negotiate or settle the entire balance of a mortgage loan is during short sale negotiations.  Even though it is not always possible to settle a deficiency balance through a short sale, a short sale typically produces a smaller overall deficiency balance, and always produces a more specific deficiency balance.  Among other reasons, this is because it can take years for a lender to foreclose, during which time default interest, charges and attorney fees continue to accrue on the underlying debt at a fairly significant rate.  In addition, the sale price for a private property in short sale is usually higher than the value of the property to the bank in foreclosure.

The most common question homeowners ask is: “How much time does the lender have to come after me for the deficiency?”  The answer is in the statute of limitations, which is five years in Florida.  But, five years from what date?  Many people think it is five years from the date they stop making mortgage payments.  This is not true.  A bank cannot even sue a homeowner to obtain a deficiency judgment until after the deficiency amount has been determined.

Depending on which route the borrower has elected to take, the five year statute of limitations begins to run either (a) from the date the property is voluntarily sold in a short sale or (b) from the auction sale date in a foreclosure.  In other words, the bank has five years from the date of any sale, be it voluntary or through foreclosure, to sue the borrower for the balance owed on a mortgage debt.  And, if the bank gets a judgment against the borrower following a successful foreclosure, the judgment can be collected for 10 years and renewed for one additional 10 year period. This means that a borrower could be haunted by a defaulted mortgage for more than 25 years.

One of the greatest advantages to a short sale (in addition to better opportunities to negotiate the deficiency balance) is that, generally speaking, a short sale will start the clock on the statute of limitations for the bank to sue for the deficiency balance much sooner than a foreclosure, which can take years to complete.

For these reasons, among many others, completing a short sale generally produces a better result than a foreclosure over the long term.  However, any borrower should consult with a real estate attorney before choosing any course of action, as there are always exceptions to any general rule.

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