Understanding the Law: What Are Anti-Deficiency Laws?

Understanding the Law: What Are Anti-Deficiency Laws?

When homeowners stop meeting their repayment obligations, mortgage lenders can initiate the process of foreclosure to recoup the losses that they’ve incurred. At the end of this process, the home is typically sold at a sheriff’s sale auction, with the proceeds going to the lender.

Sometimes, the amount that the home is sold for is less than what the borrower owed on this mortgage. If this happens, it creates what’s called a deficiency.

In some states, mortgage lenders are able to go after the borrower personally to cover this deficiency. However, anti-deficiency laws are in place in other states that prohibit or limit a residential mortgage lender’s right to recover this discrepancy from the borrower.

In certain situations, these anti-deficiency laws can protect borrowers from facing deficiency judgments, which can be extremely detrimental to their finances. 

Just like most other foreclosure rules, anti-deficiency laws are set on a state-by-state basis, with much variation, specific requirements and possible exceptions.

Deficiency Judgment: What Borrowers Need to Know

In states that allow it, mortgage lenders are able to file a civil lawsuit against a borrower to seek the difference between what the home was sold for at auction and the remaining outstanding balance on the mortgage. The lender obtains this through what’s known as a deficiency judgment, which is an official court order that requires the borrower to pay any remaining debt following a foreclosure sale.

As mentioned, what options a borrower may have to avoid a deficiency judgment depends on the state in which the home is located. In some states, borrowers can avoid a deficiency judgment by deeding their property to the lender before the process of foreclosure begins.

If you’re facing foreclosure, it’s extremely important that you know your rights as well as the rules and regulations regarding the process in your state. Because these laws can be complex and complicated, you should always consult with an experienced foreclosure lawyer to understand your options.

How Anti-Deficiency Laws Work

Anti-deficiency laws are official statutes that are on the legal books of individual states. These laws were designed to protect borrowers from facing a huge mountain of debt even after they lost a home to the foreclosure process.

These laws usually apply to purchase money loans, or mortgages, which are loans that are used specifically to purchase real estate. In some cases, refinance loans might be protected from deficiency judgments if they’re secured by a purchase money security device.

While anti-deficiency laws can vary greatly in detail from one state to the next, generally speaking, they don’t apply to vacant land or commercial properties. This means that the borrower in both of these cases wouldn’t be protected from a deficiency judgment following foreclosure. 

Many states also require that the property in question be a borrower’s primary residence for it to receive protection under anti-deficiency laws.

State-Specific Anti-Deficiency Laws

In total, there are 16 states that have anti-deficiency laws on the books. They are Wisconsin, Washington, Oregon, North Dakota, North Carolina, New Mexico, Nevada, Montana, Minnesota, Iowa, Idaho, Hawaii, Connecticut, California, Arizona and Alaska.

It is important to note, though, that some of the states on this list also include limitations and/or exceptions. 

In California, for example, the anti-deficiency law only applies to a residential property that’s used as a primary residence and that has no more than four units. It also only applies to purchase money mortgages.

The anti-deficiency law on the books in Arizona protects certain types of properties, as long as they have a purchase money mortgage. The home must be either a single-family home or a single two-family home. In addition, the home must be on 2.5 acres or less. 

Each state that has anti-deficiency laws has its own specific rules, regulations, limitations and exceptions. That’s why it’s important to educate yourself about the specific laws that apply to where you live.

Limitations and Exceptions

In addition to exceptions and limitations on the type of property, many states’ anti-deficiency laws don’t apply to certain types of loan.

Home equity lines of credit or home improvement loans may not fall under the umbrella of covered debt for anti-deficiency laws. In some states, there are also exceptions in place for loans that cover multiple properties, or for properties that have multiple liens on them.

In all of these cases, the mortgage lender, or lenders, may have the right to seek a deficiency judgment against you if your property and/or your specific loan type isn’t covered under your state’s anti-deficiency law.

Knowing whether your property is or is not covered is important if you’re facing foreclosure, because it might steer you in one direction or the next when you’re weighing your options.

Avoiding Unpaid Debt After Foreclosure

There are, of course, many concerns homeowners who are facing foreclosure have. In addition to losing your home and having to find another place to live, you must deal with the fact that your credit is likely to take a significant hit for an extended period of time if your home is sold through a foreclosure process.

In addition to that, if the current fair market value for the home is a lot less than what you owe on the mortgage, you could be on the hook for a significant amount of debt, depending on what state you live in.

If your state does not have anti-deficiency laws, you may have options to avoid a deficiency judgment. If you know that your home is likely to sell for less at auction than what you owe on the mortgage, you could do what’s called a deed-in-lieu of foreclosure.

Essentially, this is an arrangement struck between you and your mortgage lender where you will sign the deed of your property back to the lender before they foreclose on it.

In this case, you will be giving up your rights in the property in exchange for the lender not foreclosing on you.

Some borrowers may enjoy major advantages if their lender will agree to this.

For one, you’ll be released from all the debt you owe in the home immediately, without the huge hit on your credit. You’ll also not have to face public notoriety that goes along with foreclosure, since most states require the lender to advertise the date and location of all sheriff’s sales.

It’s also a way to avoid being potentially responsible for a mound of additional debt if the lender seeks a deficiency judgment against you.

Lenders do not have to agree to a deed-in-lieu of foreclosure, though, and it may take some negotiating to get it done. That’s why you should consult with a foreclosure lawyer who can present you the best options to avoid being responsible for unpaid debt.

Know Your Rights When It Comes to Foreclosure and Deficiency Judgments

Borrowers who are facing foreclosure need to be well-educated on all aspects of the proceedings. Unfortunately, there is no across-the-board standard for foreclosures, as the process varies greatly from one state to the next.

Understanding what these rules are, and whether anti-deficiency laws apply to you, are important because it can help protect you in a foreclosure situation.

If you’re facing foreclosure, it’s essential to consult with an experienced and qualified foreclosure lawyer so you can know all of your rights and options under applicable state law.