How to Avoid a Deficiency Judgment in Foreclosure

A lot of bad words begin with the letter F, and we’re not talking about the one you’re thinking of. In the real estate world that bad word is foreclosure. Foreclosure is difficult on property owners, lenders, real estate agents, and can wreck your credit for years. No matter your financial situation it’s always best to avoid foreclosure. How to avoid foreclosure on your home is easier said than done but the more information you have the more likely you can find a better solution.

Let’s learn what you need to know to avoid a deficiency judgment in foreclosure, the terms you’ll need to familiar with to find the best solution and ways you can come out better on the other side. No one, including your lender, wants to foreclose a home – let’s learn how to avoid it.

How to Avoid a Deficiency Judgment in Foreclosure

What is Deficiency Judgement in Foreclosure?

A deficiency judgment is a formal ruling made by a court against a party in default on a loan. Deficiency judgments can be applied to many loan types, but we’ll highlight home mortgages for our purposes. Let’s review an example of what a deficiency judgment looks like:

You owe $150,000 on your mortgage but you’re unable to make the required payments and your home is foreclosed on. Your lender sells your home at an auction, but it only goes for $120,000, leaving $30,000 on the bill. This $30,000 is a deficiency and a formal order to pay it is known as a deficiency judgment.

Deficiency judgments are a double penalty on mortgage borrowers since they will owe additional funds even after their accounts are drained and credit score is wrecked during foreclosure. In all cases, it’s best to avoid deficiency judgments.

How to Avoid Deficiency Judgment

Avoiding deficiency judgment is all about keeping up communication and options with the lender. Though lenders can seek a deficiency judgment in most states including Colorado, most choose not to due to the hassle and associated costs, especially if the borrow lacks assets.

The best way to avoid deficiency judgment through the foreclosure process is by keeping a healthy line of communication between you and your lender. You can explore different options together for the best possible outcome for both parties. Though many states allow for deficiency judgments, in most cases your lender will not seek it if you’re acting in good faith. A deficiency judgment is more likely if you’re hiding assets or avoiding all phone calls.

Five Tips on How to Avoid Foreclosure and Keep Your Home

If you’re reading this, you might not be to the actual foreclosure and deficiency judgment process yet but close. Even if you’ve already skipped a few mortgage payments or if your loan is nearing default there are quick actions you can take before you approach more dramatic options.

  • 1. Don’t ignore the problem. The worst thing you can do is ignore foreclosure issues.

  • 2. Keep regular and open communication with your lender. Lenders get a bad rap, but they’re run by real people who understand your problems and want to work with you to avoid foreclosure. Keep in mind your lender never wants to foreclose either. Don’t ignore contact from the lender and keep an open line of communication to negotiate a better way out.

  • 3. Know your options. There are several ways out of a bad mortgage situation depending on your situation. It’s important to speak candidly with your lender about different options.

  • 4. Know your mortgage. Always check and double-check your mortgage to be sure you know what could happen and to better learn how to prevent foreclosure.

  • 5. Be wary of foreclosure prevention offers. The foreclosure world is filled with scammers. Never turn over your property rights to someone else and verify any companies you work with are licensed, accredited, and have referrals to back their words up.

Alternatives to Foreclosure

There are many different options to avoid foreclosure and keep your home, but those options don’t always apply. Here are some alternatives to foreclosure to avoid destroying your credit.

Making life easier by modifying your loan is always a good idea but must take place before your mortgage goes into default. Loan modification involves calling your lender, expressing your concerns and possibly renegotiating to a different interest rate or payment structure. Your lender prefers that you keep making regular payments and will normally work with you to avoid nonpayment.

A short sale is when both the borrower and lender agree to sell the home at a price lower than the overall amount owed on the mortgage. Your borrower will lose money on a short sale, but the money recouped generally overrides the money that would be spent on a foreclosure. Keep in mind that your lender could still file a deficiency judgment after a short sale, but most won’t if you’re acting in good faith. A short sale will negatively affect your credit but doesn’t come with a 7-year freeze seen in foreclosure.

Some agents specialize in purchasing homes at risk of pre-closure but be wary that foreclosure purchases are a popular playground for scammers and bad apples. While there are certainly predatory foreclosure agents, they’re also plenty of reputable agents that want to help you avoid the bad credit and other issues that come from foreclosure. If you can find a reputable real estate agent to purchase your foreclosure you will be better off.

Deficiency judgments, short sales, and everything else included with a foreclosure can be very confusing. It’s recommended to hire an expert to help you work through foreclosure issues.

Help to avoid foreclosure can be found at your local real estate company, foreclosure law office, local housing resources like the U.S. Department of Housing and Urban Development, and even some lenders carry in-house foreclosure experts. You have options but you must find someone to help you understand the confusing terms and situations that come with foreclosure. Professional help will cost money but it’s worth it when you’re on the brink of losing tens or hundreds of thousands of dollars.

Navigating Foreclosure

If your mortgage is underwater there are some paths to avoid foreclosure and keep your home, but they require candid talks between you and your lender. Hire someone to better help you understand the process and always keep an open line of communication with your lender to avoid foreclosure or issues associated with it. With the right help and resources, you can avoid foreclosure and keep your home.


Tatyana Sturm-Storck

Ranked #9 in Colorado by America’s Best Real Estate Agents Real Trends for most closed transactions by an individual.
Realtor®, GRI, CDPE, ABR